[Senate Hearing 110-713]
[From the U.S. Government Publishing Office]
S. Hrg. 110-713
RESOURCE CURSE OR BLESSING? AFRICA'S MANAGEMENT OF ITS EXTRACTIVE
INDUSTRIES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON AFRICAN AFFAIRS
OF THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 24, 2008
__________
Printed for the use of the Committee on Foreign Relations
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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COMMITTEE ON FOREIGN RELATIONS
JOSEPH R. BIDEN, Jr., Delaware, Chairman
CHRISTOPHER J. DODD, Connecticut RICHARD G. LUGAR, Indiana
JOHN F. KERRY, Massachusetts CHUCK HAGEL, Nebraska
RUSSELL D. FEINGOLD, Wisconsin NORM COLEMAN, Minnesota
BARBARA BOXER, California BOB CORKER, Tennessee
BILL NELSON, Florida GEORGE V. VOINOVICH, Ohio
BARACK OBAMA, Illinois LISA MURKOWSKI, Alaska
ROBERT MENENDEZ, New Jersey JIM DeMINT, South Carolina
BENJAMIN L. CARDIN, Maryland JOHNNY ISAKSON, Georgia
ROBERT P. CASEY, Jr., Pennsylvania DAVID VITTER, Louisiana
JIM WEBB, Virginia JOHN BARRASSO, Wyoming
Antony J. Blinken, Staff Director
Kenneth A. Myers, Jr., Republican Staff Director
------
SUBCOMMITTEE ON AFRICAN AFFAIRS
RUSSELL D. FEINGOLD, Wisconsin, Chairman
BILL NELSON, Florida JOHNNY ISAKSON, Georgia
BARACK OBAMA, Illinois NORM COLEMAN, Minnesota
BENJAMIN L. CARDIN, Maryland DAVID VITTER, Louisiana
JIM WEBB, Virginia CHUCK HAGEL, Nebraska
(ii)
C O N T E N T S
----------
Page
Collier, Paul, director, Center for the Study of African
Economies, University of Oxford, Oxford, United Kingdom........ 40
Prepared statement........................................... 41
Feingold, Hon. Russell D., U.S. Senator from Wisconsin, opening
statement...................................................... 1
Goldwyn, David, president, Goldwyn International Strategies,
Washington, DC................................................. 30
Prepared statement........................................... 32
Isakson, Hon. Johnny, U.S. Senator from Georgia, statement....... 4
Lugar, Hon. Richard G., U.S. Senator from Indiana, statement..... 5
Moss, Todd, Deputy Assistant Secretary for African Affairs,
Department of State; accompanied by Stephen J. Gallogly,
Director, International Energy and Commodity Policy, Department
of State, Washington, DC....................................... 7
Prepared statement........................................... 10
Taylor, Simon, director, Global Witness, London, United Kingdom.. 21
Prepared statement........................................... 23
Additional Material Submitted for the Record
Schumer, Hon. Charles E., U.S. Senator from New York, prepared
statement...................................................... 59
``Publish What You Pay'' United States coalition, statement of... 61
``Managing the Exploitation of Natural Assets'' by Paul Collier,
University of Oxford and Anthony J. Venables, University of
Oxford and CEPR................................................ 62
(iii)
RESOURCE CURSE OR BLESSING? AFRICA'S MANAGEMENT OF ITS EXTRACTIVE
INDUSTRIES
----------
WEDNESDAY, SEPTEMBER 24, 2008
U.S. Senate,
Subcommittee on African Affairs,
Committee on Foreign Relations,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:33 a.m., in
room SD-419, Dirksen Senate Office Building, Hon. Russell
Feingold, chairman of the subcommittee, presiding.
Present: Senators Feingold, Lugar, and Isakson.
OPENING STATEMENT OF HON. RUSSELL D. FEINGOLD,
U.S. SENATOR FROM WISCONSIN
Senator Feingold. I call the hearing to order, and I'd like
to welcome all of you to this hearing entitled ``Resource Curse
Or Blessing? Africa's Management of Its Extractive
Industries.'' I am of course honored to be joined by the
ranking member of the subcommittee, Senator Isakson, and of
course the ranking member of the full committee, Senator Lugar,
and I would like each of them to deliver some opening remarks
in just a moment.
This is likely the last hearing of the subcommittee in the
110th Congress and it closes out a busy 2 years. Prior to today
we have held 10 hearings on both specific countries in crisis,
including Kenya, Somalia, Sudan, and Zimbabwe, and also on
emerging trends, such as the United States-Africa Command,
democratization, and China role in Africa.
Today's topic cuts across all those areas. Africa's
abundance of natural resources holds great economic potential
and the promise of pulling so many people out of poverty. Yet
we have unfortunately seen the opposite, aptly described by
some by the phrase ``resource curse,'' as competition for
control of these resources has more often fueled corruption and
inequality than growth and development. Even worse, that
competition has frequently devolved into conflict.
A decade ago we watched in horror as the trade in diamonds
became intertwined with war, destruction, and displacement in
places like Angola, Liberia, and Sierra Leone. Since that time
much progress has been made to combat those so-called blood
diamonds. In 2000 the Kimberley process was launched, leading
to the establishment of an international certification scheme
to ensure rough diamonds do not originate in conflict zones.
Kimberley has been a tremendous success, even though it is
unable to fix the problem completely and cannot, unfortunately,
ensure that the citizens of each country receive the benefits
they deserve. It does, however, provide a model that can be
strengthened and expanded to address other natural resource
concerns across the continent and do so in a way that decreases
conflict and corruption, overriding tangible benefits to local
communities.
However, to date we have not had a Kimberley-like process
for cassiterite, coltan, copper, gold, or timber. The
mismanagement and exploitation of these resources continues to
undermine stability in places such as Cote d'Ivoire, the
Democratic Republic of Congo, and even Zimbabwe. The lack of
mechanisms to regulate or at least scrutinize the trade in
these resources handicaps diplomatic and humanitarian efforts
to bring peace to these places.
One of the goals of today's hearing is to recognize this
gap and consider ways to address it. Similar challenges exist
with oil and gas, output of which has skyrocketed in recent
years in Angola, Chad, Equatorial Guinea, Nigeria, and Sudan.
In fact, few people realize it, but more U.S. oil imports now
come from Africa than the entire Persian Gulf.
These extractive industries have provided massive revenues,
but the growing production is not translated into reducing
poverty. Despite their considerable wealth, Africa's leading
oil-producing nations remain home to some of the worst poverty
in the world and are consistently rated as some of the world's
most corrupt places. In fact, just yesterday Transparency
International released its corruption index, with African
countries, many of them oil-producing, comprising 6 of the 10
most corrupt: Somalia, Sudan, Chad, Guinea, Equatorial Guinea,
and the Democratic Republic of Congo.
Moreover, oil production has been central to the intense
violence in Nigeria's Delta region as well as the conflicts
throughout Sudan. These are examples of how the corruption that
stems from resource mismanagement can undercut the rule of law,
breeding weak and failing states.
Failure to confront the competition for resources in these
places undermines ongoing stabilization efforts and puts U.S.
interests at risk. Examining the underlying dynamics and the
risks of the resource curse is especially important when nearly
a dozen African countries are beginning new oil and gas
exploration. There is of course real excitement in these
countries at the potential for extractive industries to
stimulate economic growth. But it is essential that they avoid
the problems that have plagued many of their resource-rich
friends and neighbors across the continent.
Considerable progress has been made over the last 5 years
to identify mistakes and come up with the best practices for
natural resources management. There have also emerged
initiatives to support the implementation of those lessons,
most notably the Extractive Industries Transparency Initiative,
known as EITI. EITI facilitates technical expertise and
reporting guidelines for countries to promote transparency in
their oil, gas, and mining sectors. It is worth noting that, of
the EITI's 23 current candidate countries, 16 are in Africa.
EITI is a promising start, but it alone has been
insufficient to ensure transparency and accountability in the
extractive industries. First, targeted assistance is needed to
support the capacity of governments to implement the EITI
guidelines. Second, the World Bank has called for a more
comprehensive approach that incorporates the range of
activities from exploration of resources through to the
spending of resource revenues by governments.
Today's hearing will explore how the United States and
international financial institutions are working to address
these shortcomings of EITI and how we might do more. At the
same time, though, we know that it is often a lack of will
rather than capacity that ultimately hinders transparent and
equitable resource management. Therefore we must also consider
how the United States can leverage actors involved in Africa's
extractive industries.
One way is the Extractive Industry Transparency Disclosure
Act, of which I am an original cosponsor. Legislation was
introduced by my colleague Senator Schumer, who has submitted a
statement on the bill for this hearing. The bill would require
all companies registered with the SEC--and it covers 27 of the
30 largest operating international organization companies--to
file an annual report of all payments made to foreign
governments for the extraction of natural resources. Requiring
companies to provide that information can help public
institutions here and in Africa to combat corruption.
If there are no objections from my colleagues, I am pleased
to submit Senator Schumer's statement into the record and I
look forward to working with him to pass the bill.
Regulating companies needs to be complemented by direct
engagement with foreign governments on good government, respect
for the environment, and protection of human rights. Sadly,
under this current administration we have seen U.S. capacity to
engage and advance these principles shrink in Africa. Certainly
the growing role of China in the continent, as well as India,
Russia, and others, has been a major factor beyond our control.
But too often we have lacked high-level leadership and
necessary interagency coordination to implement coherent and
comprehensive strategies in Africa.
As our sights turn to the next administration and a new
Congress, this will need to change, not only to help reverse
the stubborn resource curse in Africa, but also to build stable
long-term relationships. I hope today's hearing will help us
assess how we might move in that direction.
Now let me quickly introduce our two distinguished panels
so we can begin that discussion. First we will hear from Deputy
Assistant Secretary for African Affairs, Todd Moss, who has an
extensive background in issues of financial and economic
development in Africa. I realize that this issue cuts across
several Bureaus at the State Department, so I really appreciate
your willingness to testify today on State's current approach
to these issues and the challenges involved.
We also sent an invitation to the Treasury Department. They
were unable to send a representative today, which is
unfortunate given their important role in this discussion.
Our second panel features an all-star lineup, beginning
with Professor Paul Collier, the director of the Center for the
Study of African Economies at Oxford University. Dr. Collier is
known--widely known these days, for his award-winning book
entitled ``The Bottom Billion: While the Poorest Countries Are
Failing, What Can Be Done About It?'' He was one of the first
to identify the intersection between the resource curse and
civil wars in Africa. Both as an academic and World Bank
adviser, he's been a leading voice over the last decade on
issues of conflict and development. So it is an honor to have
him joining us today to give us his latest policy
recommendations for how African governments, international
financial institutions, and the United States can help reverse
this resource curse.
We also hear from David Goldwyn, president of the energy
consulting firm Goldwyn International Strategies. Mr. Goldwyn
brings a wealth of experience on these issues as well, not only
from the private sector through his current position, but also
as a senior associate of the Center for Strategic and
International Studies and from his previous work and leadership
roles within the Departments of Energy and State. So I look
forward to Mr. Goldwyn's assessment of what is needed both
institutionally and operationally to enable the United States
to better leverage Africa's extractive industries to promote
good governance and stability.
Finally, we will hear from Simon Taylor, the cofounder and
director of Global Witness. Global Witness has worked for the
last 15 years through hard-hitting investigations and civil
society advocacy to break the links between natural resources,
conflict, and corruption. They and their NGO colleagues have
been instrumental to many of the successes I described earlier.
In fact, the very holding of this hearing and Senator Durbin's
Judiciary hearing later this morning on corporate
responsibility is a testament to the many years NGOs have spent
trying to raise awareness of these issues. I hope Mr. Taylor
will give us the perspective of civil society on what progress
has been made and what gaps still exist in international
efforts to combat conflict resources and ensure transparency in
Africa's extractive industries.
So thank you to all our witnesses for being here and I look
forward to your testimony and our subsequent discussion. Thank
you for your patience, my colleagues. I wanted to set the stage
for this. But I now turn to my distinguished ranking member,
Senator Isakson, for his opening remarks.
STATEMENT OF HON. JOHNNY ISAKSON, U.S. SENATOR FROM GEORGIA
Senator Isakson. Well, thank you, Chairman Feingold. I was
thinking last night as I prepared for this hearing, 17 years
ago my oldest son wrote his master's thesis at University of
Georgia on the subject of the Dutch disease and its impact of
the Middle East. The Dutch disease economically is when a
country is rich in a natural resource, but doesn't reinvest the
proceeds from its extraction into its people in terms of
education, manufacturing, economic development, health care,
and the like. What happens is you end up with a region of the
world, just like we have in the Middle East now, where the
countries are wealthy, but the people basically have to
purchase all of their expertise, medicine, health care, things
like that, from outside the country because money was never
reinvested within the country itself.
Africa is on the doorstep of having the opportunity to take
the wealth from these extractive industries, invest it in its
people and education and health care and training and economic
development, to where it can be a shining star on the world
globe and the world stage.
In January I visited Equatorial Guinea and saw both the
evidence of the start of that as well as the need for
improvement in a number of areas. President Obiang and his
country discovered natural gas a few years ago. Marathon Oil
and Hess went in on a joint venture with them, built a billion
dollar gas liquification facility in the Gulf of Guinea, where
they now export around the world, including occasionally into
Elba Island in the State of Georgia.
I went and saw firsthand where they're building a huge
hospital in Malabo, one of the finest hospitals, quite frankly,
I've ever seen. They have contracted with Israel to build that
hospital. I went and saw the development of roads and streets
and infrastructure that are a significant sign of investment of
funds in the country.
But I also know education is at a low level as are many of
the other resources that help a country and a people to
improve. So, Mr. Chairman, I think your desire and wisdom in
calling this hearing today on extractive industries and the
value of the wealth of Africa, but the importance of seeing to
it that the proceeds are reinvested in the best interests of
the African people and obviously democracy is most appropriate
at this time.
I look forward to hearing from our other witnesses and I'm
pleased to share the minority side with the distinguished
ranking member, Senator Lugar.
Senator Feingold. Thank you, Senator Isakson. I want to
thank you not only for your comments, but for your diligent
involvement in the subcommittee throughout this Congress as
long as you've been on here. It's been really appreciated how
serious you've taken this and how you've taken a lot of time
out of your busy schedule to be involved in these hearings.
I thank you.
Senator Isakson. Thank you.
Senator Feingold. Senator Lugar.
STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM INDIANA
Senator Lugar. Thank you very much, Mr. Chairman. Let me
just take this opportunity to thank you again for your
leadership, not only this year with the subcommittee, but for
many years. It's really been a passionate interest in Africa,
which all the committee members appreciate.
I thank, likewise, Senator Isakson for being such an
excellent ranking member on our side, because the two of you
have conducted the 10 hearings that you've mentioned. They've
been extensive in a year in which in some other areas of the
committee activity there has not been the same due diligence
perhaps. But it has been wonderful to work with you.
Let me just say I thank the chairman for holding this
hearing on a topic that is clearly very timely. This summer I
commissioned the minority staff of our Foreign Relations
Committee to assess the impact of the so-called resource curse
and to evaluate the effectiveness of current United States and
international efforts to remedy the problem. Staff examined
more than 20 resource-rich developing countries, including five
in Africa--Angola, Chad, Equatorial Guinea, Ghana, and Nigeria.
The resulting report, entitled ``The Petroleum and Poverty
Paradox,'' has gone to print and will be available in hard copy
in the next few days. An electronic copy is available now on my
Senate Web site.
Observers have long known that finding large deposits of
oil and gas does not necessarily improve the quality of life
for a developing country that is unprepared to handle a sudden
windfall of resource wealth. It can often lead to corruption,
setbacks in progress toward democracy, enrichment of elites,
political instability, and a failure to invest in education,
agriculture, and industry as they create jobs and produce
exports.
Countries as diverse as The Netherlands, which discovered
oil and gas in the 1960s, and Nigeria, which has been a major
oil exporter for a quarter of a century, have suffered this
resource curse in one way or another. The problem has come into
sharp focus lately because oil discoveries in developing
countries and the soaring price of petroleum and other key
commodities have produced sudden new riches for many poor
countries.
But the impact of this curse is not limited to the
resource-rich countries themselves. The United States and other
developed countries are also affected. As I noted in the
introduction to the forthcoming staff report, it exacerbates
global poverty, which can be a seedbed for terrorism. It dulls
the effect of our foreign assistance. It empowers autocrats and
dictators and it can crimp world petroleum supplies by breeding
instability. The ongoing rebel attacks on Nigeria's oil
facilities, for example, are a factor in today's record high
crude prices.
Because the resource curse affects our economic, security,
and humanitarian interests, it should assume a more prominent
place in our foreign and development policy. On this score, my
staff found that, while there have been some positive steps,
progress has been uneven. Concentrated effort is necessary
because once a country discovers oil the United States and
other international donors quickly lose leverage. In Africa,
staff found the United States programs intended to help
countries manage their oil money wisely could only succeed when
there is sufficient political will to fight corruption and to
make other difficult choices on the part of the country.
In these countries, the international community should work
to improve the institutional capacity to handle large capital
flows and to address their pressing development needs. Staff
concluded that U.S. policy in these African countries should
work to build trust in long-term relationships and that this
requires a strengthened United States Embassy presence.
The report also found that where national leaders are
willing to face the problem outside experts can help promote
stronger antigraft and transparency policies to make it harder
for government officials to hide corruption and easier for
citizens to follow the money to make sure it isn't wasted.
The Extractive Industries Transparency Initiative is one of
several international efforts to fight the resource curse. The
report urges the administration to give the EITI more vigorous
support. It also urges the oil, gas, and mining companies,
which often express support for transparency, to do more to
encourage it in the countries where they operate.
I look forward along with you, Mr. Chairman, to the
insights of our witnesses.
Senator Feingold. I thank my colleagues for their comments.
Now we can turn to Mr. Moss for the first panel.
STATEMENT OF TODD MOSS, DEPUTY ASSISTANT SECRETARY FOR AFRICAN
AFFAIRS, DEPARTMENT OF STATE; ACCOMPANIED BY STEPHEN J.
GALLOGLY, DIRECTOR, INTERNATIONAL ENERGY AND COMMODITY POLICY,
DEPARTMENT OF STATE, WASHINGTON, DC
Mr. Moss. Mr. Chairman, members of the committee, thank you
for inviting me here to testify on Africa's resources. I want
to thank the committee for their interest in this critical
subject. I also want to note it's highly appropriate that we're
here today to have a hearing on corruption in Africa in a room
numbered 4-1-9.
Conflict resolution and the promotion of good governance
are hallmarks of this administration's policy in Africa. Since
2000 we've seen seven major conflicts on the continent come to
an end. U.S. policy in Africa has emphasized helping African
countries build economies that generate prosperity and create a
middle class that is the bedrock of democracy. The United
States actively works to build partnerships with capable
governments who can be allies in the fight against 21st century
transnational threats such as crime, drugs, disease, and
treatment.
To do this effectively, we've ramped up our cooperation and
assistance. With the support of Congress, total U.S. aid to
Africa reached an all-time high of $5.7 billion in 2007. But we
also recognize that for these partnerships to grow and to be
sustainable we must help countries develop the capacity to use
their own resources more wisely. Managing the continent's
resource wealth in a way that brings broad benefits to
populations and reduces poverty is a key priority for both the
United States and for Africa.
Unfortunately, too many countries have failed to leverage
their natural resource wealth into strong economies and strong
states. The good fortune of having valuable commodities in the
ground should provide countries with an opportunity to make
lives and societies much better, but the opposite often occurs.
In too many countries oil, gas, and mineral wealth have instead
become associated with high poverty rates, weak state
institutions, corruption, and war.
Although the resource curse is not a uniquely African
problem, Africa has many economies that rely on just one or two
extractive exports. What explains this paradox? Economists tend
to point to Dutch disease, whereby higher prices for a dominant
export commodity crowd out the development of other industries,
typically through the appreciation of the exchange rate. We see
this in Nigeria, where high oil prices drive up the value of
the naira and harm the competitiveness of Nigerian industry and
agriculture and also manage to turn the focus of politics to
controlling the oil wealth.
A second concern is the reinforcement of weak and
unaccountable state institutions. When a government gains its
income from the activities of a few oil or mining companies,
rather than from taxing its own population, there are few
incentives to be responsive to the people's needs. In Nigeria,
more than three-quarters of government revenue comes from the
oil and gas sector, so there is little incentive, especially at
a time of high international energy prices, to build a broader
tax base or to deliver public services.
The most devastating effect is the vulnerability to
conflict. It's no coincidence that some of the most vicious
civil and regional conflicts have been sustained by competition
over diamonds and minerals.
So the question is how to break this downward resource-
governance cycle and create a virtuous one? Well, when possible
we try to get in front of the problem. A recent oil find
offshore Ghana is still some years away from production. Before
the money flows, the Government of Ghana is actively seeking
mechanisms to manage future oil wealth and to ensure that
revenues are used in a transparent and productive way that
bolsters its democracy. We are collaborating with the
government, with oil companies, civil society, and relevant
international organizations as the Government of Ghana develops
the best model to achieve these goals.
In countries where the resource curse has already set in,
we must encourage transparency and find other ways to create
accountability. The Extractive Industries Transparency
Initiative is one important part of this effort. EITI
establishes accounting and reporting norms for revenues from
natural resources. As the chairman noted, of the 23 candidate
countries 16 are from sub-Saharan Africa. The United States
fully supports EITI and has committed $3 million for fiscal
year 2008 to a multidonor EITI trust fund. We've also supported
through USAID specific EITI implementation projects in Nigeria
and the Democratic Republic of the Congo.
But it is worth keeping in mind that EITI focuses on only
one link of the chain that can turn oil and gold into roads and
schools. The Kimberley process monitors and controls the rough
diamond trade to prevent the use of so-called blood diamonds to
finance wars and to enrich warlords. This initiative now
encompasses 73 countries, has tracked $38 billion in
international diamond trade, and covers virtually the entire
international market.
Special arrangements have been implemented in extreme cases
to put extra international oversight on key sectors to try to
prevent revenues from leaking or being misused. In Liberia the
Governance and Economic Management Assistance Program, or
GEMAP, provides intensive external oversight on key ministries.
GEMAP has been critical in allowing the trade in diamonds and
timber to resume in Liberia. So far GEMAP has been highly
successful in building confidence and improving fiscal
management in Liberia.
I'll just note, the Liberia Forestry Initiative is one
component of this. This includes a state-of-the-art chain of
custody system where there are bar codes literally on every log
that is cut down, and it's supported by a member of the U.S.
Forestry Service, an expert that is based in the Embassy in
Monrovia.
In Chad, on the other hand, a high-profile effort to
sequester oil revenues offshore now appears to be failing. The
different outcomes between Chad and Liberia and other cases
highlight that donor-supported activities to strengthen revenue
management are likely only to succeed where there is strong
country ownership.
While these efforts are helpful, much of what is necessary
to beat the resource curse are not necessarily new, high
profile initiatives, but rather the solid footings of sound
economic management. Publishing detailed budgets, independent
auditing, expenditure tracking, and other practices that are
the norm in the United States are still not prevalent in many
countries. Technical assistance from AID and the U.S. Treasury
in these practices have been helpful in Nigeria, Guinea,
Liberia, Zambia, and elsewhere. In other countries, the U.S.
works with the World Bank and other partners to promote budget
management.
In spite of some progress thus far, we face continued
challenges. There are severe limits to the influence of the
international community when powerful or corrupt local
politicians thrive by defending opacity instead of
transparency. The emergence of new investors and donors who are
less concerned about transparency and accountability can
undermine voluntary schemes like EITI. High commodity prices
similarly can reduce government incentives to seek reform.
One approach is to support reform from within by aiding
those who are confronting entrenched interests. A more
challenging avenue is to convince governments that the gains of
transparency are greater in a political sense than the threat
to rent-seeking. One key to this effort is to generate public
awareness and demand for transparency, which is one reason that
the EITI is such a valuable effort.
Stronger anticorruption efforts are also vital by both
developing and developed countries. The United States is
aggressively enforcing our own laws against foreign bribery.
Other countries must do so as well. This year, at U.S. urging,
the G-8 prepared for the first time an accountability report on
actions taken by each G-8 country to implement anticorruption
commitments.
Let me end on a positive note about how current global
trends can be helpful in beating the resource curse. More and
more African countries genuinely want to attract private
investment outside of the extractive sectors and, fortunately,
there is now greater investor appetite for Africa. As
governments shift strategy from squeezing mining and oil to try
to attract new companies in new sectors, they recognize that
they need to make the business environment more attractive.
This means better and more open economic policies and
compliance with international business norms.
This shift also has political and governance benefits. By
creating an independent business class, countries broaden the
tax base and create a constituency for even more reform. The
line between the future winners and losers in Africa will be
drawn between the governments that recognize and seize upon
this shift and those that cling stubbornly to the past. The
policy of the United States is to help more countries make the
right choice.
I'm happy to take your questions. Thank you.
[The prepared statement of Mr. Moss follows:]
Prepared Statement of Todd Moss, Deputy Assistant Secretary, Bureau of
African Affairs, Department of State, Washington, DC
Mr. Chairman and members of the committee, thank you for inviting
me here today to testify on Africa's resources. Conflict resolution and
the promotion of good governance are hallmarks of this administration's
policy in Africa. Since 2000, seven major conflicts on the continent
have ended.
U.S. policy in Africa has emphasized helping African countries
build economies that generate prosperity and create a middle class that
is the bedrock of democracy. The United States actively works to build
partnerships with capable governments who can be allies in the fight
against the 21st century transnational threats of crime, drugs,
disease, and terrorism. To do this effectively, we have ramped up our
cooperation and assistance. With the support of Congress, total U.S.
aid to Africa reached an all time high of $5.7 billion in 2007--$4.5
billion in bilateral assistance and $1.2 billion in multilateral. But,
we also recognize that for these partnerships to grow and be
sustainable, we must help countries develop the capacity to use their
own resources more wisely.
Managing the continent's resource wealth in a way that brings
broad benefits to populations and reduces poverty is a key priority for
Africa and the United States. Unfortunately, too many countries have
failed to leverage their natural resource wealth into strong economies
and strong states. The luck of having valuable commodities in the
ground should provide countries with the opportunity to make lives and
societies better, but the opposite often occurs. In too many countries,
oil, gas, and mineral wealth have instead become associated with high
poverty rates, weak state institutions, corruption, and war. Although
the ``resource curse'' is not a uniquely African problem, Africa has
many economies that rely on one or two extractive exports.
What explains this paradox? Economists point to ``Dutch disease,''
whereby higher prices for a dominant export commodity crowd out the
development of other industries, typically through appreciation of the
exchange rate. We see this in Nigeria where high oil prices drive up
the value of the naira, harm the competitiveness of Nigerian industry
and agriculture, and turn the focus of politics to controlling oil
wealth.
A second concern is the reinforcement of weak and unaccountable
state institutions. When a government gains its income from the
activities of a few oil or mining companies rather than taxing its
population, there are few incentives to be responsive to the people's
needs or wishes. In Nigeria, more than three-quarters of government
revenue comes from the oil and gas sector, so there is little
incentive--especially in a time of high energy prices--to build a
broader tax base or to deliver public services.
The most devastating effect is the vulnerability to conflict. It is
no coincidence that some of the most vicious civil and regional wars
have been sustained by competition over diamonds and minerals.
How to break the downward resource-governance cycle, and create a
virtuous one? When possible, get in front of the problem. A recent oil
find offshore Ghana is still some years away from production. Before
the money flows, the Government of Ghana is actively seeking mechanisms
to manage future oil wealth and to ensure revenues are used in a
transparent and productive way that bolsters its democracy. We are
collaborating with the government, oil companies, civil society, and
international organizations as they develop the best model to achieve
these goals.
In countries where the resource curse has already set in, we must
encourage transparency and find other ways to create accountability.
The Extractive Industries Transparency Initiative (EITI) is one
important part of this effort. EITI establishes accounting and
reporting norms for revenues from natural resources. EITI now has 23
candidate countries, 16 of which are in sub-Saharan Africa. The United
States supports EITI as part of larger efforts to enhance transparency
and accountability, and has committed $3 million for FY08 to a
multidonor EITI trust fund. We have also supported through USAID
specific EITI implementation projects in Nigeria and the Democratic
Republic of the Congo. But it is worth keeping in mind that EITI
focuses on only one link of the chain that can turn oil and gold into
roads and schools.
The Kimberley Process monitors and controls the rough diamond trade
to prevent the use of so-called blood diamonds to finance wars and to
enrich warlords. This initiative now encompasses 73 countries, has
tracked $38 billion in the diamond trade, and covers virtually the
entire international market.
Special arrangements have been implemented in extreme cases to put
extra international oversight on key sectors to try to prevent revenues
from leaking or being misused. In Liberia, the Governance and Economic
Management Assistance Program (GEMAP) provides intensive external
oversight on key ministries, allowing the trade in diamonds and timber
to resume. So far this has been highly successful in building
confidence and improving fiscal management. In Chad, on the other hand,
an effort to sequester oil revenues offshore appears to be failing. The
different outcomes in these cases highlight that the donor-supported
activities to strengthen extractive industries revenue management are
likely only to succeed where there is strong country ownership.
While these efforts are helpful, much of what is necessary to beat
the resource curse are not necessarily new high-profile initiatives,
but rather the solid footings of sound economic management. Publishing
detailed budgets, independent auditing, expenditure tracking, and other
practices that are the norm in the United States are still not
prevalent in many countries. Technical assistance from USAID and the
U.S. Treasury in these practices has been helpful in Nigeria, Guinea,
Liberia, and Zambia. In other countries, the U.S. works with the World
Bank and other partners to promote budget management.
In spite of some progress thus far, we face continued challenges.
There are severe limits to the influence of the international community
when powerful, corrupt, or greedy local politicians thrive by defending
opacity instead of transparency. The emergence of new investors and
donors who are less concerned about transparency and accountability can
undermine voluntary schemes like EITI. High commodity prices similarly
can often reduce government incentives for reform.
One approach is to support reform from within by aiding those who
are confronting entrenched interests. A more challenging avenue is to
convince governments that the gains of transparency are greater, in a
political sense, than the threat to rent-seeking. One key to this
effort is to generate public awareness and demand for transparency,
which is one reason the EITI is a valuable effort.
Stronger anticorruption efforts are also vital. Developing
countries must take sustained efforts to investigate, prosecute, and
punish corrupt officials and those who corrupt them. Our G-8 partners
and other developed and emerging countries need to do more to go after
businesses and individuals from their countries who bribe public and
political party officials. The United States is aggressively enforcing
our laws against foreign bribery; others must do so, too. Commitments
to deny safe havens to corrupt officials and their assets need to be
implemented.
Ultimately, there must be greater accountability by both developed
countries and partner governments to follow through on commitments
undertaken in this area. This year, at U.S. urging, the G-8 prepared
for the first time an accountability report on actions taken by each G-
8 country to implement anticorruption commitments. At their summit in
July, G-8 leaders pledged to update this report annually. This effort
complements peer review work done in the Organization for Economic
Cooperation and Development and emerging efforts under the United
Nations Convention Against Corruption.
Let me end on a positive note about how current global trends can
be helpful in beating the resource curse. More and more African
countries genuinely want to attract private investment outside of the
extractive sectors. And fortunately, there is now greater investor
appetite for Africa. As governments shift strategy from squeezing
mining and oil to trying to attract new companies in new sectors, they
recognize that they need to make the business environment more
attractive. This means better and more open economic policies and
compliance with international business norms. This shift also has
political and governance benefits. By building an independent business
class, countries broaden the tax base and create a constituency for
more reform.
The line between the future winners and losers in Africa will be
drawn between the governments that recognize and seize upon this shift
and those that cling stubbornly to the past. The policy of the United
States is to help more countries make the right choice.
Senator Feingold. Thank you very much, Mr. Moss, and I will
begin--we'll begin with 7-minute rounds for questions.
As you know, the EITI is approaching a critical stage with
its first tranche of candidate countries soon to reach the
deadline at which their progress toward implementation will be
evaluated. This will be a major test for this program's
credibility. What specifically is the United States doing to
support African candidate countries in EITI implementation, as
well as to provide high-level support for the broader
initiative?
Mr. Moss. As I mentioned, we have made a--we have committed
to make a contribution for the trust fund. Then at the country
level, the candidate countries, several of them have made
proposals, mostly through USAID, for implementation technical
assistance. The biggest programs there are in Nigeria and DRC.
I have Steve Gallogly, who is the State Department's point
person on EITI. I'll invite him to add any additional details.
Senator Feingold. If you could give me a sense of how much
we're giving to the EITI and what kind of help we're giving to
these countries that are doing these applications.
Mr. Gallogly. We're committing $3 million to the multidonor
trust fund in fiscal year 2008. That will be transferred
shortly, in the next week or two. And we've committed in the
last 2 fiscal years $2 million helping, as you mentioned, DRC
and Nigeria, as well as Peru.
In addition to that--that's specific programs--all
embassies are involved. We have contacts all the time with the
EITI secretariat. They reach out to us. We reach out to our
embassies and engage when little issues come up involving civil
society or the government or providing assistance. So we're
there around the world in all these countries, and not just, of
course, in the countries involved in EITI. Good governance and
transparency are important everywhere.
Senator Feingold. Mr. Moss, how has the State Department
integrated support for EITI and its principles into its own aid
program? Has there been any consideration of making U.S.
nonessential assistance contingent on EITI principles,
especially for countries such as Angola that are not even
members of EITI?
Mr. Moss. I think that when we're looking at country
strategies transparency, promoting transparency and
accountability, is absolutely a central focus. I'm not sure
that's always reflected in the budget, partly because, as you
know, a lot of our resources are directed to health and
education sectors, but also because this kind of activity is
not necessarily very capital-intensive. A lot of it is through
encouraging governments to try to see the management and
economic benefits of pursuing certain policies. These technical
assistance programs tend to be just a very small number of
people that are involved, and when you compare that to, say, a
very large ARV delivery program, which is very costly, with
lots of large budgets, it may look like it's very
disproportionate. But that's partly the nature of the problem
and the nature of the cost of trying to engage on these issues.
Senator Feingold. But what about the contingency on EITI
for countries like Angola?
Mr. Moss. Well, with Angola, the Angolans have actually
made some progress in transparency in their accounts. They are
starting to publish a lot of their financial figures. The
Angolans have expressed that they have political sensitivities
to formally joining the EITI and they've opted not to do so at
this time, but they're continuing to make the argument to us,
to the IMF, and to the international community that they're
still committed to those principles, even if they remain
outside.
I think one thing I've noticed in my interactions with the
Government of Angola is that it's actually looking to improve
management, and when it's presented in a manner of this is a
way to help you manage your own resources better, they're very
open to that. However, for historical reasons they're very
sensitive to any idea that outside forces are coming in and
forcing them to do anything.
Senator Feingold. Where natural resources are intertwined
with ongoing violence, how does the State Department seek to
address that and integrate economic regulatory measures into
conflict resolution, prevention, stabilization efforts? For
example, it's widely known that the plundering of resources
such as gold underpins the continued violence in the eastern
Democratic Republic of Congo. What efforts are being made or
could be made by the United States to regulate that trade?
Mr. Moss. I think the violence that we're seeing, that we
have seen, in eastern Congo is, of course, extremely worrying,
and making sure that the peace in eastern DRC sticks is a very
high priority of the State Department. The presence of so many
lootable items in that region--mines, coltan, and different
things that can be lifted out that are quite high value--have
clearly been a factor in sustaining those conflicts and have
allowed a proliferation of fragmented militias that can self-
finance.
I think that we have tried to put a huge effort on
political dialog in the east and on bolstering the peacekeeping
forces that are there now and helping to build capacity of the
Congolese forces to repel some of the insurgent forces
operating there. I think it's important to recognize that the
conflicts that we saw flare up this week in eastern DRC is
really a continuation of some of the unfinished business from
the Rwanda genocide of 1994, in this extremely complex problem
that's going to, unfortunately, be with us for some time.
Trying to find ways of squeezing those warlords so that they
don't have the finances to continue is obviously an area that
we take very, very seriously.
Senator Feingold. In this discussion, of course, it's
impossible to overlook the oil-rich Niger Delta, which is home
to continuing unrest and insurgency, increasingly attacking oil
installations. The United States obviously has a role in this
situation, with Nigeria being the fifth biggest source of U.S.
oil imports. What steps has the administration taken to address
this growing unrest and what points of leverage do we actually
have with the Government of Nigeria?
Mr. Moss. Thank you for that question. I was actually in
the Niger Delta earlier this year. I was able to go to Scravos
and Kwa-ibo to see the issues firsthand. It is a very, very
complicated situation down there. We have now, because the
problem of the Delta has festered for so long, we've now seen
what had been legitimate political grievances evolve into
mostly criminal activity, and those criminal links have gone
right into the government and into the military, making
resolution of that difficult.
The new government that's been in place in Nigeria about 18
months came to power saying that the Niger Delta was one of
their top priorities, resolving that issue. We took their word
on that and we have had repeated dialog with them in a number
of areas where the United States can help the Government of
Nigeria deal with that problem. We've actually worked quite
closely with the British Government in formulating these offers
and the strategy. It looks at helping to promote political
dialog, helping to promote budget management, looking at what
kinds of development projects could get started quite quickly
so that there's visible progress, so that people feel that
they're starting to gain some benefits, and last, to help deal
with the security situation, to help promote responsible
anticriminal and antimilitant security activity.
As you probably have seen, the Nigerian Government has gone
through a period of uncertainty. The responsibility for Delta
strategy has passed from different ministries. There is now
supposed to be a Niger Delta ministry created. We don't yet
know who will lead that. But several previous efforts to come
up with a strategy have fallen by the wayside.
So we have continued, and we're doing so this week with the
Nigerians at UNA in New York, continuing to dialog with them on
the need to push the political dialog, to get projects started,
and to work on transparency and budget management in the
region.
Two things I'll note. One is that in Nigeria a lot of the
power rests with the Governors, so we are actively reaching out
to deal with some of the key states, because dealing with the
revenue streams at those levels is now important. Many of the
budget issues in Nigeria have seen great improvements from the
previous Nigerian administration and now the problem is at the
state level.
Senator Feingold. Mr. Moss, I'm going to cut you off here
because I'm way over my time. But I will return to this in the
next round. But we want to give Senator Isakson a chance.
Senator Isakson. Is the United States the sponsor of EITI?
Is that our initiative or is that a World Bank initiative?
Mr. Moss. Well, it was started, if I remember correctly, it
was started as a United Kingdom initiative, but the United
States has been a firm supporter from the beginning.
Senator Isakson. I think you said 16 sub-Saharan countries
are participating in EITI; is that correct?
Mr. Moss. There are 16 African countries that are currently
candidate countries, which gives them a window of several years
to meet full compliance. There are no countries of the 23 that
have been rated fully compliant yet.
Senator Isakson. But to help me understand it, is
Equatorial Guinea one of those 16?
Mr. Moss. Yes, it is.
Senator Isakson. When they were fully compliant, what would
they be doing in terms of transparency and disclosure under
EITI with regard to their natural gas liquification production?
Mr. Moss. I'm going to ask Steve if he could detail the
exact criteria for full compliance.
Mr. Gallogly. Full compliance would be they would be
reporting their revenues that they receive from companies,
including for natural gas and oil production and from the LNG
facility, and companies would be reporting to the validators
system that the EITI secretariat is setting up, independent
validators. They would be reporting the same set of revenues
that they paid to the government. The validators will look at
reconciling that these match up, that they total up and they
match up with what the government reported they received and
the companies said they paid. Then there's a long procedure to
make sure that this is done, that civil society is involved and
other elements of the society are involved. Then they would be
considered compliant based on the finding from the validators,
the independent validators.
Senator Isakson. I would hope that the end result is that
transparency and sunshine is the best cure for corruption.
Mr. Gallogly. The idea is that this would be public, how
much revenues that they have received from this, and so this
would bring pressure on the governments from the people to
say--the governments could say, well, a lot went to costs and
this. So they have a number, what they received, and then
people--the strong theory, I believe the people would say, What
are we getting from these revenues? And the government would
have to answer for these revenues. That's the fundamental
basis.
Senator Isakson. In something like this, the carrot-and-
stick approach always seems to work. What's the carrot for
these 16 countries that are trying to become compliant?
Mr. Gallogly. The carrot is their image for investment.
Foreign companies would be more interested in investing there
because it tends to be more stable. There's a certain benefit
in status among their competing countries. It's something the
U.S. raises in meetings with all of these countries as an ask,
something that we press for them to be involved actively in
EITI. We press other countries that would be investing
countries to support the process.
So it is a sense of developing a better reputation in terms
of politically, geopolitically, but also as a place to invest.
Senator Isakson. And I presume the stick would be the
absence of that investment because they weren't.
Mr. Gallogly. The main stick is the absence, and also it
would affect the assessment, the U.S. assessment of that
country's efforts. When they're saying, well, they ask us for
certain things, we say, well, we're asking you to make
progress. So it affects our assessment of that country, their
engagement, their positive engagement. It's a plus in terms of
dealing with the U.S. and other countries like the United
States.
Mr. Moss. If I may, the additional carrot--and quite
frankly, the larger carrot--is and should be legitimacy with
their own population, that then feels--many countries, the
average person on the street feels that the government steals
almost all the money. Nobody has any idea what's coming in or
what's going out. But just this, even this small amount of
disclosure, can actually have quite a big impact in helping to
legitimize a government in the eyes of their own people.
Senator Isakson. Does China recognize EITI or in any way
encourage countries to be compliant with EITI?
Mr. Gallogly. Well, when China invests in a country that is
implementing EITI they're covered by the EITI voluntary rules
just like anybody else. When we engage with China, we encourage
them to encourage their companies to be as cooperative as
possible, and we point out that it's in their interest because
countries that use their revenues wisely are more reliable
producers. We're all in this together. China needs oil as much
as we do and they need reliable suppliers. So it's not in their
interest to have unstable oil producers around the world. More
stability in oil-producing states is better for China as well
as for the United States.
Senator Isakson. I just wanted to echo what Secretary Moss
said about the increased emphasis or interest in investment in
Africa. Former Ambassador Andrew Young, who's a good friend of
mine, a native of Georgia, runs Good Works, which is a major
company in promoting African investment by United States
companies into Africa. We've now started direct flights to
South Africa from Atlanta because of the commerce that's
increasing there.
So I think this program is a tremendous program that lets
sunshine in as a kind of deterrent to corruption and as a
positive reward to the people of Africa to ultimately get some
of those revenues going into their economic and educational
infrastructure within the country. So I commend you on what
you're doing, and that's all the questions I have.
Senator Feingold. Thank you, Senator Isakson.
Senator Lugar.
Senator Lugar. Thank you very much, Mr. Chairman.
Mr. Moss, the chairman mentioned in his opening statement
that there currently is legislation before the House and the
Senate that would require United States listed companies to
provide significant information regarding their financial
contracts with natural resource-rich countries. Let me ask,
what is the view of the administration on this legislation that
would require this listing on the stock exchanges, and do you
have a further comment as to the efficacy of that legislation,
how it would work, and what the implications might be in the
countries involved?
Mr. Moss. We are aware of this legislation and we're
supportive of additional efforts to put pressure on all the
actors for greater disclosure. I think, however, comment on
pending legislation, I think we probably wouldn't do that at
this time.
Senator Lugar. Well, why not? In other words, we are having
a hearing today on this general subject and I'm just curious as
to where we all stand on this.
Mr. Moss. I think this would take--quite frankly, I think
this would take a larger interagency discussion, and I
certainly wouldn't want to speak for my Treasury and other
interagency colleagues about where they stood on this.
Senator Lugar. Well, let me then pursue a subject that
you've just touched upon in response to my colleagues. In
Nigeria, for example, for the moment our U.S. assistance level,
I am advised, is about $490 million this year. Of that, $10.6
million comes for the program called U.S. Governing Justly and
Democratically. Now, whether the $490 million covers much in
terms of health and education--at least that is where much of
it is aimed--what kind of dialog do we have with the Government
of Nigeria with regard to our joint efforts, let's say
budgetwise?
If Nigeria is receiving considerable resources from
extractive industries and thus much better able to provide
health, education, and welfare benefits for the citizens,
conceivably our aid ought to go somewhere else, or be
coordinated in a way in which we are not simply doing the work
that Nigeria might do if it were in fact having this
transparency, this dialog with all citizens, as to their
welfare.
So describe in a sophisticated way really the intermeshing
of these funds, the $490 million or whatever may be our
contribution this year--it may be more in the future--with this
business of the new wealth, huge wealth, the ability to do very
different levels of service, things that could not have been
done before?
Mr. Moss. Well, you're absolutely right that Nigeria has a
lot of its own resources. Their foreign reserves now are north
of $70 billion at the central bank. So the problem in Nigeria
is not now nor really has it ever been a shortage of cash. The
vast majority of--the vast, vast bulk of U.S. assistance
program is PEPFAR-related. That is because Nigeria is such a
critical country in the region and dealing with AIDS and other
communicable disease there is of critical nature of making sure
that it doesn't spread.
So again, this gets back to my point that it appears
there's this large budget imbalance there, but that's because
the transparency issues are not big ticket money items.
Our discussions with the Nigerians on budget issues, I
think at the Federal level--the Government in Nigeria is
different from other countries in Africa in that the states
really have a very, very large portion of the budget and a lot
of financial autonomy there. So I think our discussions at the
Federal level have been quite good. The government, certainly
in their reform period of roughly 2003 to 2005, put in place
some quite good measures, including publishing details of the
budget in the newspaper, which sounds small but actually had
quite a big impact in Nigeria.
I think that that dialog is still ongoing, goes quite well.
Those discussions will continue at the bank-fund annual
meetings in a couple weeks time. Where we've tried to ramp that
up is looking again at the state level. That's where the
transparency is the least obviously, and quite frankly that's
where the big problem is on the budget side. That is especially
true in the Niger Delta, where 13 percent of total national
revenue is spent in those core oil-producing states.
Again, this is a relatively slow process, helping to build
capacity there and getting politicians to understand and to
start to see that better management of these revenues can be in
their benefit, rather than just seen as attacking a slush fund
that they may be using for political purposes.
Senator Lugar. Let me just ask, you mentioned there's maybe
$70 billion of reserves now that have come largely from these
extractive industries. This is at the central government level,
presumably. Does each of the Governors have a different budget
for health or welfare or what have you? Does not the
government, the central government holding all these reserves,
have something to say about the quality of care?
What I'm trying to get to is there clearly must be a
budgetary implication of holding $70 billion in the bank in
what you can do out on the hustings.
Mr. Moss. Sure, sure. Well, we've certainly taken the view
that their ability to spend--to save, excuse me--to save during
an oil boom, which has really never happened before in Nigeria,
is a positive sign of prudent management. One thing that the
government has done that I think has been very positive is this
year--in the past they had these fiscal responsibility bills at
the Federal level--this year the government said, in exchange
for getting additional cash out of a different account, not the
reserves but the excess crude account, you at the states have
to pass your own fiscal responsibility bills. This year all
states will do that. We'll see how it goes. It's the very first
year and for many of these states it's the first time that they
will publish a budget, that they will have really any level of
open scrutiny. So I don't think it will be a pretty process,
but it's the beginning of what will be a long-term road.
Senator Lugar. It's a step forward. Congratulations to you
if you've helped to induce that.
I yield the floor, Mr. Chairman.
Senator Feingold. Thank you, Senator Lugar.
Back to the legislation that's been introduced. It would be
extremely helpful if we could get the administration's view on
this, either support or neutral or negative, some time in the
near future, certainly before the end of the administration. I
understand there's going to be a new administration, but we'd
like the view of this administration, because I'd like to be
able to argue, as I think others would, that there is a
bipartisan interest in this and that it's a useful piece of
legislation.
So please, as soon as possible if you could get us a more
definite answer than we got. We do understand this bill was
only introduced in July, but I think all of us would like to
know the view.
I would like to clarify, since it was noted that the United
States supports EITI, but we're not a member, are we, of EITI?
And why is that?
Mr. Gallogly. We're not an implementing country in the
sense that we implement the rules of EITI. We're a supporting
country of the EITI and we're on the board of EITI. So it's not
a legal international organization, but we're referred to as a
member, and I think legitimately so since we're--other
supporting countries are not implementing. The only supporting
country that is implementing the EITI rules is Norway, and the
other investor countries are not, that are perceived as not
having the problem.
I think with this process it would complicate it much too
much early if it was just focused on a global issue rather than
some of the countries that face unique challenges separate from
the challenges faced in Canada and the United States or
Australia.
Senator Feingold. Mr. Moss, back to the situation in
Nigeria and the Niger Delta. Isn't it true that the United
States is severely handicapped by our lack of presence in the
Delta region and our inconsistent diplomatic approach? I have
been to this region and that area in particular in the river
and I recognize the insecurity in the Delta makes it very hard
for U.S. Embassy officials, who are doing great work in an
already tough posting, to travel there. But how do we collect
information and develop our analysis of the situation?
Mr. Moss. Sure. First, we do travel down to the Delta when
it's possible for security reasons. As I mentioned, I was down
there. Under Secretary Jeffrey was just down there about 2
months ago. Ambassador Sanders has been down a couple of times
and she's continuing to try to work with diplomatic security to
allow her greater freedom to go down there.
I think for the most part, the vast majority of the
interaction with people in the Delta is done elsewhere in
Nigeria, in Lagos. A lot of the political leaders and
influential power brokers from the Delta actually spend most of
their time in Lagos. So it's actually quite easy to have access
to them. So it's not as difficult as it seems, although we
agree that we would like to get down there a lot more than we
are able.
I know that it's not just the United States. All the
diplomatic missions have problems getting their security people
to allow them to go down there. But it's certainly something
that I know that the current Ambassador is trying to push very
strongly.
Senator Feingold. We've already talked a good bit about
this, but despite launching its own national version of the
EITI and saying all the right things, reports suggest that the
Nigerian Government is complicit in the illegal trade of oil
and corruption, which as you've certainly suggested, remains
rampant. How are we addressing these serious allegations and
what impact do they have on our bilateral relationship with the
Nigerian Government?
Mr. Moss. It is clear that illegal oil bunkering--there are
people complicit in different levels of government, starting at
the very local level and working its way up. It does, quite
frankly, affect our bilateral relationship quite seriously. I
think that we have--we've been disappointed with the lack of
movement, particularly with the economic and financial crimes
commission, which had been built under the previous
administration as a credible agency tackling probably Nigeria's
No. 1 issue--corruption--and we haven't seen that momentum
sustained and it has affected our bilateral relationship.
I think that what we've tried to do is to maintain an open
dialog with the government wherever possible and try to find
windows of opportunity where we can engage with them. But a
critical part of that is getting the Nigerian Government to
recognize that the Niger Delta is not just a domestic problem,
that it is an international problem. For about the first year
of the administration of the new Yar'adua administration, they
were insisting it was a domestic issue and they did not want to
internationalize it. I think we've successfully convinced them
that that's no longer the case, particularly working with the
British and other governments.
One point I would make on this, and this is partly sparked
by some of the comments of Prime Minister Brown recently, is
that there have been proposals, because Nigeria is important to
U.S. energy security, that we should have increased U.S.
military engagement in Nigeria. I think that further
militarizing the Niger Delta would be highly unlikely to be
constructive to enhancing our energy security.
It's something that we often hear proposed and it's
something that I know the Nigerians are very sensitive about,
and certainly we've taken the view that that would be
counterproductive.
Senator Feingold. In August 2006 President Bush launched an
antikleptocracy initiative to hold foreign government officials
accountable for high-level corruption. Following on this,
Congress passed legislation in 2007 requiring the Secretary of
State to investigate and ban foreign government officials
involved in natural resource corruption from entering the
United States.
What specific actions is the State Department carrying out
to support the President's initiative and fulfill this
requirement?
Mr. Moss. Yes. Proclamation 7750 I think is a very welcome
change that allows us to deny visas to the United States by
folks that are involved in corruption. I think that it's
something that we need to probably wield more liberally than we
do now. I know that there's a hesitancy to become--to be used
in what may be political tit for tat in a local country, where
corruption allegations are quite easy to make and quite
difficult to prove, and that we don't want to get drawn into
that.
But I think that, especially officials that seek to be
international influence peddlers or international statesmen
certainly like to come to the United States, and I think that
more aggressive use of the visa ban is something that we should
certainly be looking at using more aggressively.
Senator Feingold. Thank you.
Senator Isakson, do you have further questions?
Senator Isakson. No further questions, Mr. Chairman.
Senator Feingold. Senator Lugar.
Senator Lugar. Thank you, Mr. Chairman.
I just want to follow up for a moment on my questioning
about the legislation that Senator Feingold had offered, and
which, in fact, was offered in the House of Representatives, I
understand it, the year before last. So it's been around for a
while.
Without getting you into difficulty with your brothers over
in the Department of the Treasury, who are unhappily absent
today, apparently there have been some questions raised over in
that area with regard to this legislation. I have no idea where
the State Department may be. I just simply ask this as a matter
of curiosity. How within the administration are questions of
this sort resolved, or is there any attempt to do so? Because
very clearly we're asking for transparency from African
countries, and others for that matter--it doesn't necessarily
apply just to Africa--but at the same time there seems to be
some reticence on the part of our own officialdom and our own
business community to come forward with this sort of
information.
Do you have any further comment on this predicament?
Mr. Moss. Well, I think that there are always concerns
about U.S. competitiveness. But I do think that the U.S.,
because of the Foreign Corrupt Practices Act, quite frankly,
has been at the forefront of the international community, well
ahead of almost all other countries in terms of making sure
that our own companies comply and don't contribute to these
kinds of problems.
I will absolutely take your questions back to our
colleagues and we'll have that discussion. I think that the
possibility that this will be passed will help to galvanize
minds and get them in the room to think a little bit harder
about that.
Senator Lugar. Let me also inquire, sort of, in the fine
points of the EITI situation. Now, here we, the United States,
as your colleague, Mr. Gallogly, has pointed out, has not
become a member of EITI. Yet we are participating and helping
out other countries. But what's the hangup here? In other
words, why aren't we across the finish line, as a member? Is
this once again a Treasury-State Department or a problem within
State? What is the dilemma?
Mr. Moss. I think that we are members. I think what Mr.
Gallogly was trying to say is that we're not implementing the
EITI because the United States does not--is, first of all, not
a resource--it wouldn't fall under the category that we have
extractive exports above a certain threshold. So I think that
in that sense, that's why Norway is the only OECD country
that's implementing it, because of its significant oil exports.
Senator Lugar. In other words, you have to have exports as
a part of your GNP that are more significant than whatever ours
are as a part of ours?
Mr. Moss. I think the normal threshold is 25 percent of
exports, is that right?
Mr. Gallogly. I'm not sure there's a technical number. I'll
check that.
Mr. Moss. I think it's more of a question of whether
exports of extractive industries are so dominant to your
economy that it's having a potentially harmful effect. Whether
the U.S. would qualify in that manner, I think probably not.
But I'll leave that to others to decide.
Senator Lugar. I just raise the issue because clearly a
good part of our questioning of you today has been about this
issue of transparency and advocacy to other countries to adopt
all sorts of reports and so forth that are alien perhaps to
their cultures, but not unknown to ours.
Now, if, in fact, our problem is simply reticence on the
part of those in government, business, or whatever, that they
don't want to be troubled with all of this, or as a matter of
fact they're all above it--these other countries though are now
sort of developing themselves, as opposed to our institutions--
this doesn't really set the right tone. I appreciate your
candidness in addressing this, but also this forum for raising
these issues that at least some of us are concerned about and
will continue to raise questions about it with whichever
administration happens to come along.
Thank you very much, Mr. Chairman.
Senator Feingold. Thank you so much, Senator Lugar.
Mr. Moss, thank you for your testimony, your patience in
answering our questions.
We'll now turn to the second panel.
Thank you, gentlemen. We'll ask that you limit your remarks
to 5 minutes each and we'll certainly put your full statements
in the record, and we'll begin with Mr. Taylor.
STATEMENT OF SIMON TAYLOR, DIRECTOR, GLOBAL WITNESS, LONDON,
UNITED KINGDOM
Mr. Taylor. Thank you, Mr. Chairman. Thank you, members of
the subcommittee. I'm very honored to be able to give you our
opinions on these matters. Thank you very much for including
our statement in the record. I'll briefly refer to a number of
bits as we go through.
I want to focus a little bit on Angola because I quite
categorically, I think, disagree with the description of Angola
in terms of its performance that was given earlier. Angola sold
roughly $43 billion worth of oil last year. We're now 6 years
after the end of the fourth civil war. It still has the highest
infant mortality rate in the world and one in four children
don't make their fifth birthday, which I think really by
anyone's description is a travesty.
We have to ask where the money has gone. This is one of the
key reasons why we launched the ``Publish What You Pay''
campaign, of which EITI was a response to that initiative.
Unfortunately, we can trace the story of Angola across the rest
of the Gulf of Guinea to a greater or lesser extent for
different reasons in different countries. The situation is
pretty dire in Equatorial Guinea, in Congo-Brazzaville. We
refer to a number of examples to illustrate that in our
testimony.
What do we have to do with this? I think just to summarize,
what we need to address these problems is actually a cocktail
of mechanisms, of which EITI we've heard lots of very good
things about it today and we continue to support it. We're also
a member of the board and will continue to do so. We think that
EITI is an excellent initiative. We want to see it progress
further.
With that in mind, I also want to particularly thank
Senators Leahy and Lugar for providing the additional funding
for the EITI process coming from the United States. I think
that's excellent. We'd like to see that continue.
I think a key thing for the new administration is that the
next big EITI meeting is taking place in February, so we need
to see the new administration very early on getting its act
together, pardon the expression. But we need to see the new
administration landing on its feet at that meeting, able to
ramp up the U.S.'s participation in the process.
What could that be? I think more outreach. A question was
asked earlier about China. Let's see China take part in the
process.
With regard to the comments just now about U.S.
participation, I think one of the key aspects of the EITI is
that it's not a corruption club. It's a process of best
performance. I think one of the best ways to bring that out
would be to have participation by all the participants, and I
include the United States. I include my country, the United
Kingdom. Norway has shown a lead by doing so. But let's see the
rest. Let's make this the good governance way to be, the global
standard club. Really, I think we would like to see
participation on that basis from the U.S.
Just one sort of correction fact. I don't think EITI is
about participation on the basis of the amount of exports you
have. It's about the governance associated with revenue
streams. I'd just like to separate that out.
So what's missing? A couple of things on a positive note I
think are an increased use of FCPA. We've seen an increased
number of prosecutions. There's a glaring absence from the
followup from the Riggs Bank scandal. We'd like to see that
carried forward because there are serious questions to be asked
there.
That brings the issue that this issue's not just about
despotic leaders. It's also about company accountability,
company performance in these matters. We've seen lots of
examples. I won't cite them now because we've referred to some
of them in the testimony. But I think it's very important to
stress that. EITI deals with this from the government
participation process and it rides over the way in which
companies have to a greater or lesser extent been also
complicit in the process.
With that in mind, what can we do about the countries for
which the people in those countries simply don't have time to
hold their breath? I'm particularly thinking again of Angola
here. How long do we have to wait with those circumstances in
Angola before Angola might just volunteer?
With that in mind, I absolutely commend the EITD bill. We
from our point of view do not accept some of the criticisms
that have been levied by the industry side in terms of the
addressing competitiveness aspect. Of the 15 world's biggest
oil and gas companies, 14 would be included, most of which are
not American companies. So the issue of competitiveness between
U.S. and foreign companies, I just simply don't accept that.
There are further statistics we cite in here.
But I think one of the beauties of the act is in one fell
swoop in a country like Angola you would force disclosure on 30
of the 33 participants in country. That's not happened. The
excuse that Angola has to sit there, as it sat in the first
EITI meeting, oh, we're just going to sit on the fence, is just
not acceptable with those kind of standards and conditions in-
country.
So we really commend you, Mr. Chairman, for supporting that
bill and we'd really like to see that go forward in the next
process.
The last thing I wanted to talk about is the followup to
the kleptocracy provision from last year. Thanks to Senator
Leahy, through an amendment in the consolidated appropriations
act, we've had a focus on the visa ban, which is clearly
technically an issue that's caused difficulty, I should say,
within the administration. It's mostly about resources. It's
very hard if you've got hardly any staff available and not much
in the way of financial resources to do this work, to really
follow through.
So we think it's very necessary as time goes forward and we
see a continuance of this process to add serious resources to
look at this. If you look at the case of Angola, a country
which is really, I would describe, as Dos Santos Inc., how can
we create the disincentives from asset stripping? I think the
real answer to that is to exclude nice places to go shopping.
You know, if you want to steal tens of billions of dollars, as
these people have, you don't want to spend it in Malabo or in
Luanda. You want to go to Fifth Avenue or the Champs-Elysees,
you want to go to nice places where you can buy luxury goods,
as we found through the credit card statements of Dennis
Chrystal and Sasu Engessu last year. Nice shopping in Spain and
so on.
We need to seriously disincentivize that.
Senator Feingold. Mr. Taylor, I'm going to ask you to
conclude your remarks if you would.
Mr. Taylor. Just my concluding remark is I think we need to
look at a mechanism that works, which needs resources to focus
around the issue of asset freezing. I know that's complicated,
but it needs to be seriously thought through, and we'd really
like to work with members and also the administration when it
comes in to address this problem.
[The prepared statement of Mr. Taylor follows:]
Prepared Statement of Simon Taylor, Director and Cofounder, Global
Witness, London, United Kingdom
Thank you, Mr. Chairman and members of this esteemed subcommittee,
for the opportunity to share my views on the critical issue of Africa's
extractive industries and how we can help make those resources benefit
the people in Africa rather than fuel corruption and conflict.
To be succinct, we are currently very far from a situation where
the majority of Africa's oil and minerals are benefiting African
people. Moreover, some natural resources continue to fuel armed
conflict in Africa, as our recent research on the Democratic Republic
of Congo and tin and coltan has revealed. However, the two most
potentially far-reaching policies that I have witnessed in 10 years of
working on this issue are currently under debate. If they go forward,
these U.S.-led initiatives on natural resource transparency and
accountability would have a very tangible impact in transforming
incentives for corruption in Africa's natural resources. These
initiatives would also be important for U.S. national interests in
promoting stable business environments and strengthening U.S. energy
security. I strongly commend you for holding this hearing today, Mr.
Chairman, so we can discuss these important policy options.
1. african oil--lots in our gas tanks, but where are the revenues
going?
To illustrate both the problems and the solutions, let's start
right at the gas pump. I would like to trace the supply chain from the
gas pump backward through each step, highlighting exactly where the
problems lie and how we can address each of those through concrete
policy solutions.
Although few people realize it, more oil from Africa now goes into
gasoline in the U.S. than from the Persian Gulf. According to the U.S.
Energy Information Administration, 23 percent of U.S. oil imports
currently come from Africa--more than the combined U.S. imports from
the Persian Gulf, which are 18 percent.\1\ The largest oil producing
nation in Africa is now Angola, which now ranks as the seventh largest
oil exporter to the U.S.--ahead of Kuwait, Russia, and Colombia
combined.\2\ So nearly one-quarter of American gasoline comes from
Africa, and Angola is Africa's largest oil producing country. All told,
Africa exported $249 billion in oil and minerals in 2006, nearly six
times the value of international aid to the continent.\3\
Yet the enormous wealth generated from the oil and minerals has not
trickled down to Africans, and in some areas these resources continue
to fuel armed conflict. Global Witness field research in July and
August 2008 uncovered substantial evidence of the involvement of armed
groups, such as Rwandan Hutu Forces Democratiques pour la Liberation du
Rwanda (FDLR), as well as units and commanders of the Congolese
national army, in the exploitation and trade of minerals and metals in
North and South Kivu. These economic activities are perpetuating
instability in the region.
To continue with the Angolan example on oil, Angola exported an
enormous $43 billion in oil last year, and its economy grew 21
percent.\4\ Yet U.N. figures show that over two-thirds of Angolans
still live on less than $2 a day, despite skyrocketing costs in the
country: Rent for a modest apartment in the capital, for example, costs
$1,500 a month.\5\ Try affording that on $2 a day. Oil wealth has also
not improved the horrific health care system in the country: Angola
still has the highest infant mortality rate in the world.\6\ Not
surprisingly, our research and IMF figures uncovered that Angola could
not account for an average of US$1.7 billion per year from 1997-2001,
which is more money than the government spent on health and education
during that period.\7\ A lack of transparency has meant that billions
of dollars cannot be accounted for, from Angola to Equatorial Guinea.
2. the supply chain and how we can influence it
So what exactly is the supply chain for African oil coming to the
U.S., and how can we influence it to help reverse the resource curse?
Step 1: Awarding of concessions
Much of the corruption associated with oil and minerals happens at
the beginning of the process--right when contracts are awarded to oil
companies, or the oil services companies that increasingly construct
and run oil infrastructure in Africa.
As former Halliburton executive Albert Jack Stanley admitted just 3
weeks ago in a guilty plea to a Houston federal court, Halliburton's
engineering subsidiary Kellogg, Brown, and Root paid over $180 million
in bribes to the Nigerian Government to win a natural gas plant
contract.\8\ Sadly, this is only the tip of the iceberg. Oil services
company Baker Hughes plead guilty to violating the Foreign Corrupt
Practices Act in Angola, Nigeria, Kazakhstan, Russia, Indonesia, and
Uzbekistan; the Angolagate scandal is about to go to trial in France,
in which the French Government lined up the French oil company Elf to
gain oil concessions in Angola and involved illegal arms shipments; the
list goes on.
So transparency has to start with the award of rights to explore
for oil and minerals, and with the award of contracts to build oil
infrastructure. The U.S. has an exemplary record amongst major oil-
consuming countries for prosecuting corrupt acts by its own companies,
and of course the FCPA was groundbreaking in its time. Still, there are
a couple of big unresolved FCPA cases where we are rather surprised at
the lack of progress--notably the SEC investigation into the Riggs Bank
affair, which I will talk about shortly.
Aside from this question of law enforcement, the U.S. should lead
other donor governments to encourage resource-rich countries to ensure
that oil and mining concessions are awarded in a transparent way, with
independent oversight to ensure there's no corruption. U.S. companies
would clearly gain from such a policy: Since their technical expertise
is superior to companies from many other countries, they have most to
gain from licensing processes which are free from corruption.
That said, of course there is a risk that people will say that the
U.S. is simply lobbying for its own companies to get preferential
access to the oil. But that's easily avoided if these reforms to
licensing are presented as a global standard which should apply to all
companies, including the Chinese and the Russians and the Indians, as
well as the Europeans and the United States.
So how to enact such reforms? Well, the U.S. has influence in some
countries via its aid programs. In others, the governments themselves
may be supportive if they feel that transparency will enable them to
get a better long-term deal for the country. There are also such
initiatives as the World Bank's new project, launched earlier this year
by Bank President Robert Zoellick, to provide resource-rich countries
in Africa with more technical support to resource governance across the
value chain. We feel that the U.S. should support that process as far
as it can.
Step 2: Revenue payments for oil, gas, and minerals
The next step in the supply chain is equally critical: Revenue
payments by extractive industry companies to governments. When
ExxonMobil or BP pays Angola for its oil, it does so in the form of
taxes, royalties, and signature bonuses. Oil companies typically
operate under production-sharing agreements which means that they are
also providing the government with a share of oil from the field: This
is often a huge source of earnings for the country.
But in the majority of resource-rich countries in Africa and around
the world, these payments are still kept secret. Citizens who demand
for better services from their governments in Africa are often met with
the response, ``Well, the oil companies didn't pay us enough, they are
exploiting us.'' These citizens have no way of verifying how much the
companies do actually pay, because it is not made a matter of public
record. Oil companies do not disclose the payments in their annual
reports, and governments do not disclose receipt of the payments in
their budget reports. And so the cycle continues--no transparency about
the billions of dollars exchanged for oil and minerals, and no
accountability for these revenues because no one knows how much
actually exchanged hands.
The secrecy that results from this opacity is bad for American
consumers and bad for Africans, and it makes it much easier for
corruption to take place. Equatorial Guinea, for example--one of the
top 20 oil exporting countries to the U.S.--keeps over $2 billion of
its government revenues in private offshore banks, according to the
IMF.\9\ When it deposited $700 million of this money into Riggs Bank
here in Washington, DC, the Senate Permanent Subcommittee on
Investigations found dozens of irregular payments, multiple individual
signatories to the accounts, and little due diligence paid to the
accounts. Riggs shut down as a result in 2004, but the corruption in
Equatorial Guinea continued. Two years later in 2006, the son of the
President of Equatorial Guinea bought a mansion in Malibu, California,
worth $35 million, which includes an 8-bedroom house, a 9-hole golf
course, swimming pool, and 15-acre beach-view property, despite his
official salary of just over $60,000 a year as a government
minister.\10\
This story is not confined to Equatorial Guinea alone. Whilst
acting as an Angolan Government official, arms dealer Pierre Falcone
reportedly bought the most expensive home ever purchased at the time in
Arizona for $10.6 million, becoming a neighbor to Chicago Bulls owner
Jerry Reinsdorf in Paradise Valley.\11\ The list goes on.
In order to help address the revenue payments issue, an
international initiative was launched in 2002 by the British
Government, the Extractive Industries Transparency Initiative (EITI).
Global Witness sits on the board of EITI, strongly supports the
initiative, and has made every effort to strengthen it since its
launch. Last year, Congress voted to finally give the U.S. an important
voice on EITI implementation by upping its contribution to the EITI
Trust Fund to $3 million, thanks to efforts in the Senate by Senators
Lugar and Leahy.
The reality is that EITI is an impressive effort, particularly in
the way that it brings together different stakeholders: Governments,
companies, and civil society groups. Where else would you find a
representatives from ExxonMobil and Chevron sitting at the same table
as civil society activists from some of the poorest countries in
Africa? To buttress current efforts on EITI, the U.S. Government should
elevate EITI to a higher priority and do more outreach at a high
diplomatic level to ensure proper implementation and integrate EITI as
a requirement through AGOA and the MCC. EITI will be at a critical
juncture for implementation over the next year, and so State Department
engagement will be important.
But EITI is not a golden key, so to speak, mainly because it is
voluntary for countries to join. As a result, the world's biggest oil
producers are simply not joining. Only one of the world's top ten oil-
producing countries--Norway--has committed to implement the EITI. Only
one OPEC member country, Nigeria, is a member. Most of the other
members are small to mid-ranking producers. These countries deserve
credit for their reform efforts, but the fact is that they account for
a small fraction of world oil supply. The country which gave rise to
the whole oil transparency movement, Angola, is not a member of EITI
and shows little appetite for joining the initiative.
The problem of transparency is urgent because a number of countries
already having hit or soon hitting their peak of oil production,
meaning that the windfall of oil revenues will start to diminish and
eventually come to an end. For example, Gabon's production peaked over
10 years ago in 1997. So these countries don't have that much time to
ensure that the revenues are really used to develop their economies for
the time when they can no longer rely on oil. EITI is an excellent
tool, but it is not sufficient.
3. a historic opportunity: the eitd act
Thankfully, today we have a historic opportunity to be a part of
that solution, starting right here in Congress. Introduced in the
Senate by Senator Chuck Schumer and cosponsored by Senators Feingold,
Leahy, Lieberman, Durbin, and Cantwell, and introduced in the House by
Financial Services Committee Chairman Barney Frank, the Extractive
Industries Transparency Disclosure Act, the EITD Act, provides exactly
that opportunity. The bill, S. 3389, provides for a low-cost, high
impact SEC rule change requiring the disclosure of payments to foreign
governments by oil, gas, and mining companies. Under the bill, all
extractive industry companies that are listed on U.S. capital markets--
including foreign corporations--would publish their revenue payments to
all foreign governments on a country-by-country basis through their
regular annual filing reports to the SEC.
The EITD Act is critical for establishing freedom of information
and a global standard for transparency in the oil sector, at a time
when oil company profits are reaching record levels. It would promote
U.S. interests by combating corruption and improving the stability of
U.S. investments abroad through improved governance in oil-producing
countries. Importantly, the bill is a powerful tool for poverty
reduction, as the transparency will enable oil revenues to be managed
in a more accountable manner.
The importance of this bill lies in its global coverage; with one
swoop, 14 out of the world's 15 largest oil and gas companies that are
publicly traded would be covered by the bill, and 27 of the top 30
companies if the list is expanded. The overwhelming majority of these
corporations are non-U.S. companies, with the bill requiring disclosure
from foreign corporations including the three major Chinese oil
companies, Russia's Lukoil, and Brazil's Petrobras.
WORLD'S TOP 14 PUBLICLY TRADED OIL CORPORATIONS COVERED BY THE BILL
------------------------------------------------------------------------
------------------------------------------------------------------------
Petrochina (China) Lukoil (Russia)
China Petroleum (China) ENI (Italy)
BP (U.K.) Repsol (Spain)
Petrobras (Brazil) ExxonMobil (U.S.)
Royal Dutch Shell (Netherlands) Chevron (U.S.)
Total (France) ConocoPhillips (U.S.)
StatoilHydro (Norway) 3Marathon Oil (U.S.)
------------------------------------------------------------------------
U.S. companies would not be put at a competitive disadvantage to
foreign corporations because of the bill. While the EITD Act would not
cover all National Oil Companies (NOCs)--state-owned companies that
predominately operate solely within their home countries and do not
compete internationally with U.S. oil companies--the vast majority of
the internationally competitive companies (including NOCs that operate
internationally, such as Petrochina, Petrobras, and StatoilHydro) would
have to report payments, and so a level playing field would ensue for
all extractive industry companies. Back to our example of Angola, 30
out of the 33 operating oil companies in Angola would be subject to
disclosure under the bill. Armed with real numbers from real oil
companies, civil society groups in Angola could finally put some muscle
in their fight for social services and accountability for the country's
oil wealth.
Transparency is not the silver bullet to solving the resource
curse, but it creates a critical underlying business environment that
makes it more difficult to engage in corruption. If all payments are
transparent, opaque money transfers will be harder to hide, secret bank
accounts will be harder to open, and company and government finances
will be more open to public scrutiny.
4. accountability: the fcpa
If transparency creates an important enabling environment for
improved resource governance, then accountability is the critical next
step to make it happen. Going back to the supply chain for our
gasoline, if revenues for the oil to produce the gasoline went astray,
what accountability is there for those funds and the individuals,
officials, and/or companies involved in those transactions? For
example, now that Halliburton's subsidiary has plead guilty of paying
$180 million in bribes, what accountability is there for Halliburton,
what accountability is there for the Nigerian officials who took the
bribes, and what mechanisms are there to return the stolen moneys? What
about future such cases elsewhere in Africa and more globally?
For the first question, Congress created a very important first
step in accountability 31 years ago with the passage of the Foreign
Corrupt Practices Act (FCPA). This law, which makes it illegal for U.S.
companies to pay bribes to foreign government officials, is far-
reaching. The law affects American and foreign corporations alike, as
Norwegian oil company Statoil and the British firm Vetco have been
found guilty of making illegal payments under the law to Iran and
Nigeria, respectively.
FCPA enforcement has stepped up dramatically in recent years,
thanks to much more rigorous scrutiny by the U.S. Department of Justice
and the SEC. The two agencies prosecuted a record 38 cases last year,
more than double the number of prosecutions in 2006 (15 cases).\12\
This has resulted in a high percentage of convictions, including prison
sentences for several former senior executives. An overwhelming 91
percent of the individuals to resolve their charges have plead guilty
or been convicted.\13\ This thorough FCPA enforcement amounts to
serious corporate accountability, and we welcome Congress's foresight
with the FCPA, as well as the DOJ and SEC's skyrocketing efforts in
applying the law. However, the FCPA investigation on Equatorial Guinea
that was reported on following the Riggs Bank Senate investigation has
never been followed up, and we urge the enforcement agencies to follow
up this case. In addition, other countries--particularly our European
allies--must follow suit and take more robust action to strengthen
their corporate accountability frameworks. The OECD Anti-Bribery
Convention remains very poorly enforced, particularly in the wake of
the multimillion dollar BAE bribery scandal in the U.K.\14\ We urge
Congress to work with the new administration to work with the U.K. and
other European countries to clean up their acts.
5. accountability ii: a critical new opportunity for congress and the
administration through anti-kleptocracy policies
But what about the other key element of accountability--holding
government officials to account for stolen funds? Unless these two
tools work in tandem, there will still be enormous incentives for
continued corruption relating to natural resources in Africa and
elsewhere.
Unfortunately, accountability of government officials still needs
to go further. Officials from Equatorial Guinea to Kazakhstan to Angola
who have been named in prosecutions relating to the siphoning off of
funds from their country's oil wealth remain in office today.
The good news is that some groundwork has been laid to begin
changing this culture of impunity, and that the U.S. Congress and the
administration can be at the forefront of this global fight. The bad
news is that there is a very long way to go. Last year for the first
time ever, Congress passed an Anti-Kleptocracy provision in the
Consolidated Appropriations Act (section 699L), thanks to an amendment
by Senator Leahy. This provision denies entry to the U.S. to all
foreign government officials whom the Secretary of State believes there
to be credible evidence that they were involved in corruption relating
to natural resources.
This builds on President Bush's announcement of a ``National
Strategy to Internationalize Efforts against Kleptocracy'' in August
2006, and Presidential Proclamation 7750 before that. The President
stated in 2006 that:
High-level corruption by senior government officials, or
kleptocracy, is a grave and corrosive abuse of power and
represents the most invidious type of public corruption. It
impedes our efforts to promote freedom and democracy, end
poverty, and combat international crime and terrorism.
Promoting transparent, accountable governance is a critical
component of our freedom agenda. Today, I am announcing a new
element in my administration's plan to fight kleptocracy . . .
which sets forth a framework to deter, prevent, and address
high-level, public corruption. It identifies critical tools to
detect and prosecute corrupt officials around the world, so
that the promise of economic assistance and growth reaches the
people.\15\
Despite worthy efforts of some dedicated bureaus, overall
enforcement of this agenda has been very limited. A small number of
cases were brought under Proclamation 7750, and while some dozen cases
reportedly are in the pipeline, it is our understanding that no cases
for the Anti-Kleptocracy provision have been brought forward to date
since the provision's passage 9 months ago. Funding and staffing
constraints for the enforcement agencies are a serious consideration
here. But more is at stake. According to numerous informed sources,
some U.S. ambassadors are still shocked at the idea that corruption and
kleptocracy should be raised with foreign governments. This was not on
the U.S. foreign policy agenda for years, and these ambassadors do not
understand why it should be. We would urge Congress to work with the
administration to change this culture as a matter of priority.
Congress currently has an important window of opportunity to
strengthen the accountability agenda on natural resources. A new Anti-
Kleptocracy provision in the draft Senate version of the State and
Foreign Operations bill, section 744, adds to the visa ban with an
asset freeze on foreign officials found to be engaging in corruption.
From my many years of working on this issue, this provision, if
implemented properly, has the potential to have a very wide-ranging
impact on resource-related corruption in Africa and elsewhere. Leaders
involved in corruption do not want to spend their money in Kinshasa or
Luanda, they want to come to Fifth Avenue, put their money in U.S. or
European banks, and buy luxury cars to drive up the California coast.
For example, the President of the Republic of Congo-Brazzaville and
his 50-person entourage that included several members of his family and
his wife's hairdresser, spent $295,000 during an 8-night stay in New
York's Waldorf-Astoria Hotel, including $13,000 in room service and
bottles of Cristal champagne.\16\ Interestingly, this spending spree
took place exactly 1 month after the World Bank and IMF granted the
country debt relief under the Highly Indebted Poor Countries Initiative
(HIPC) for being too poor to pay off its international debts, and the
hotel bill totaled more than the U.K.'s total humanitarian aid to the
Republic of Congo for the same year.\17\ The Republic of Congo is
another important African oil exporting country to the U.S., producing
247,000 barrels of oil per day.\18\ Last year, Global Witness published
documents that showed that the President's son, Denis Christel Sassou-
Nguesso, paid off personal credit card bills for Louis Vuitton and
Christian Dior luxury items totaling several hundred thousand dollars
with funds from his own shell companies. These funds appear to have
derived from the proceeds of the state oil marketing company, Cotrade,
which Mr. Christel heads.\19\
In other words, if an Anti-Kleptocracy provision with a travel ban
and asset freeze becomes law and is as rigorously enforced as the FCPA,
it will create a serious disincentive for corruption among African and
other foreign government officials. Just as we use all the financial
and diplomatic tools available to us for antiterrorism efforts, we must
equally use all foreign policy instruments in the fight against
corruption. I urge Congress to pass section 744 of the Appropriations
bill and to provide additional funding to operationalize the visa ban
and asset provisions to the enforcement agencies.
Furthermore, the Regional Bureaus of the State Department should
thoroughly sensitize U.S. ambassadors on the Anti-Kleptocracy strategy
and Appropriations provisions.
6. conclusion
As I conclude, Mr. Chairman, let me go back to the gas pump here in
the U.S. We now know that nearly a quarter of the imported oil that
goes into the gasoline that goes into our cars comes from Africa, and
the road that that oil travels takes us through secret financial
payments, financing of ill-gotten mansions in Malibu and luxurious
hotel bills in New York, bribes paid by American and foreign companies,
and very little improvement in the day-to-day lives of most Africans.
In sum, we are still far from eradicating the disease known as the
``resource curse'' in Africa. But there is now growing attention to
this issue, from your holding this hearing today and a related hearing
chaired by Senator Durbin down the hall to Bob Zoellick's new
initiatives at the World Bank.
But more importantly, Mr. Chairman, Congress now has two critical
legislative opportunities--one on transparency and the other on
accountability--to make a real impact on reducing incentives for
natural resource corruption. The EITD Act and the Anti-Kleptocracy
provision are the most serious pieces of legislation I have seen on
this issue in over a decade. These initiatives will not only help
Africans but will benefit U.S. energy security through better
governance in oil-rich countries. The next time we stand at the gas
pump, let us not forget where that gas comes from and what we can do to
change the corruption that accompanies it.
----------------
\1\ Energy Information Administration statistics on U.S. oil
imports from 2007. Available at http://tonto.eia.doe.gov/dnav/pet/
pet_move_neti_a_ep00_IMN_mbblpd_a.htm.
\2\ Angola produced 1.9 million barrels of crude oil per day in
June 2008, ahead of Nigeria's 1.74 million. In terms of U.S. imports of
crude oil, Angola totaled 636,000 barrels, while Kuwait stood at
179,000 barrels, Russia was at 228,000 barrels, and Colombia exported
177,000 barrels. ``Angolan Oil Exports Expected To Rise 14% in
October,'' African Oil Journal, August 25, 2008. Available at http://
www.africanoiljournal.com/08-25-2008_angola.htm. For U.S. oil import
statistics, see U.S. Energy Information Administration, http://
www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/
company_level_imports/current/import.html.
\3\ Total international aid was $43 billion. OECD Statistical Data,
available at www.oecd.org.
\4\ OPEC Revenues Fact Sheet, U.S. Energy Information
Administration, 2008. Available at http://www.eia.doe.gov/emeu/cabs/
OPEC_Revenues/Factsheet.html; the IMF estimates that the Angola's GDP
grew 21.130 percent in 2007. IMF World Economic Outlook Database.
Available at www.imf.org.
\5\ ``Angola's Poor Left Out of Oil Bonanza,'' AFP. September 3,
2008. Available at http://afp.google.com/article/
ALeqM5hA8pYy2PEMsj5tOj4lpuR7BgWVuQ.
\6\ This is 184 out of 1,000. CIA World Factbook, June 2007:
https://www.cia.gov/library/publications/the-world-factbook/index.html.
\7\ That spending totaled $4.27 bn. ``Time for Transparency,''
Global Witness, March 25, 2004: http://www.globalwitness.org/
media_library_detail.php/115/en/time_for_transparency.
\8\ ``Halliburton Ex-Official Pleads Guilty in Bribe Case,'' Wall
Street Journal, September 4, 2008.
\9\ In 2006, Equatorial Guinea kept $2.099 billion of its
government revenues in private banks abroad, and in 2007 the IMF
estimates that this figure jumped to $2.893 billion. IMF Article IV
Consultation Staff report, May 2008. Available at https://www.imf.org/
external/pubs/ft/scr/2008/cr08156.pdf, p. 33.
\10\ Global Witness, ``African Minister Buys Multi-Million Dollar
California Mansion,'' 8 November 2006, available at http://
www.globalwitness.org/media_library_detail.php/468/en/african_
minister_buys_multi_million_dollar_califor.
\11\ Ken Silverstein, ``The Arms Dealer Next Door,'' In These
Times, December 2001. Available at http://www.inthesetimes.com/issue/
26/04/feature4.shtml.
\12\ Gibson, Dunn, and Crutcher LLP, ``2008 Mid-Year FCPA Update.''
Available at http://www.gibsondunn.com/Publications/Pages/2008Mid-
YearFCPAUpdate.aspx.
\13\ Ibid.
\14\ http://www.iht.com/articles/2008/07/30/business/30bae.php.
\15\ ``President's Statement on Kleptocracy,'' August 10, 2006.
Available at http://www.whitehouse.gov/news/releases/2006/08/
20060810.html.
\16\ http://www.timesonline.co.uk/tol/news/world/article729928.ece.
\17\ Ibid.
\18\ This was in 2006. Energy Information Administration data for
Congo (Brazzaville), available at http://tonto.eia.doe.gov/country/
country_energy_data.cfm?fips=CF.
\19\ Global Witness, ``Congo: Is President's Son Paying for
Designer Shopping Sprees With Country's Oil Money?'' Available at
www.globalwitness.org.
Senator Feingold. Thank you, Mr. Taylor, and I appreciate
your highlighting Angola. I was first basically exposed to
Africa in Angola in 1994, and in particular this issue, and
returned again in 1999. We have this tendency, because we have
so many difficulties with our situation domestically and
internationally, to say, well, Angola's getting better, and
then you don't apply the kinds of tests and strength that you
have to.
I want to assure you that I as chairman of this committee
will continue to focus in particular on Angola because of my
longstanding concern about the resource problems there.
Thank you.
Mr. Goldwyn.
STATEMENT OF DAVID GOLDWYN, PRESIDENT, GOLDWYN INTERNATIONAL
STRATEGIES, WASHINGTON, DC
Mr. Goldwyn. Thank you, Mr. Chairman, members of the
committee, for holding this hearing.
In my view there has been some real important progress on
the resource curse over the last 5 years, but there have been
major changes in Africa as well in the energy sector and our
policy hasn't kept up with it. The reality is that, despite
this progress, we really haven't made much of a dent in this
problem, and the United States in particular has not been a
player in this issue, not a material player, and I think we
need to get ourselves organized and deploy resources in a
different way, because we can make a difference.
It's worth noting the progress because when you work this
long on something and there's been progress you want to note
it. EITI has gone from being a British initiative to being
internationalized. Twenty-three countries have stood up to be
graded--some may pass and some may fail. That's real progress.
On the IMF side, they have now mainstreamed fiscal
responsibility, fiscal monitoring, into their doctrine. They're
giving a lot of countries help by helping the finance
ministries learn how to manage the sector. They're trying to
spy on their own national oil companies so they can figure out
where the money is. That's progress.
The World Bank is giving technical assistance in this area
and EITI Plus Plus--I think they're coming up with a different
name--is going to help countries look at how the sector is
managed. That's very important.
International oil companies have figured out that
transparency is a way they can have a level playing field and
they can enhance their reputations by showing they're not the
ones with the hand in the till. For some national oil
companies, they've learned that transparency pays. Particularly
in North Africa, they're using tenders and things like that.
They find out they can make an incredible amount of money by
being transparent.
That's all great, but in terms of poverty reduction we
really haven't made much of a dent, and there are a lot of new
challenges. The first one is political will, and that is really
critical. Even in Nigeria, where I helped lead a very extensive
effort to monitor physical and financial and the process of the
business, without government buy-in, without government
leadership, you really can't solve problems, you can't make
progress. That's the biggest challenge.
Capacity. A lot of governments that are now doing
exploration don't have the ability to negotiate the deals, much
less manage the money. The number of countries has skyrocketed.
Every country in Africa with a coastline has exploration going
on right now.
The focus really should be on business operations. I'm an
EITI validator and I hope to validate some countries soon. EITI
is important, but the real corruption is not hands in the till
for the most part. The real corruption in the industry is how
the business is done, who gets the acreage, how do you trade
oil for product. It's how it's operated. So a reconciliation of
dollars and cents is important for spreading sunshine and you
need to do it, but it doesn't get at the heart of the problem.
So we need to have a much more expansive view of what's going
on.
Certainly in terms of social investment, the expenditure
side, we're really not doing enough as a U.S. Government, as
others, to figure out once you know how much money is there,
how is it being spent; is it being spent in the right sector.
For the U.S., we have not kept up with the changes in the
market in a lot of different ways. Part of this--Senator
Feingold, in your Georgetown speech you looked at this--there
are crises in other areas. Diplomats get drawn away. Iraq,
things like that. The Africa Bureau is a crisis bureau. They
have five crises on their hands and that's what they do. They
don't build relationships.
But the United States has lost influence in Africa in a
dramatic way. We have first disengaged diplomatically. Eight
years ago we had a United States-Nigeria working group, we had
a United States-Africa energy ministers partnership, we had a
dialog with Angola. We used to have a relationship with these
people to talk about the things we disagreed on. Those were all
dismantled. There are governments there we hardly even talk to
except to scold them.
So we only have a modest diplomatic presence in northern
Nigeria and places like that, so we're not really on the
ground. And we spend a lot of money in Africa, mostly on
health, but a minuscule amount in governance, and particularly
on transparency. In our system it's up to the regional or the
country manager in every country to decide how they want to
spend the money. It's not driven from the center. So there's no
coordination, no focus. Security is a problem now. And the
Niger Delta. The Niger Delta is important for strategic
reasons, but primarily if we don't deal with Nigeria, which is
the biggest case there, then we're not making a material
difference on transparency.
So I think what the United States needs to do is get
organized in a different way. First we need a policy, in which
security, stability, and energy stability are all part of one
whole. We need resources. We need somebody on the seventh floor
of the State Department whose job it is to lead this policy. We
need to have diplomats and we need to have untied technical
assistance for things like EITI.
We need respectful engagement with these countries. Our
people need to go to those countries and talk to them, not only
about what we're interested in, but what they're interested in,
because if we talk to them about development, about power
generation, about water, then they have a stake in the
relationship. We're not just going over there to tell them how
we think they ought to do their business, which requires
diplomatic resources.
We need to integrate security into the political calculus,
because security is what a lot of these countries are
interested in. Not giving weapons without any conditions about
human rights, but if we talk to them about their security,
improving Coast Guards, protecting assets, we're having a
conversation about something in which they have a stake.
In the Niger Delta, we have not been materially engaged,
not effectively engaged. We have to be humble. It is incredibly
complex. But the fact is if we don't help quietly on how they
can do the development, and at a high level on doing the
diplomacy, we're not making much of a difference. We need to
play well with others on assistance. The U.K. spends a lot of
money. We need to work together. And we need to engage China
and the EU on their issues.
We can only do so much with policy papers and State
Department wiring diagrams. The main thing we need is
leadership, people in positions who are willing to make a
difference. In this case I thank the committee for your
leadership on this. Your oversight makes a difference to the
executive branch and hopefully with your continued interest in
this we'll have a policy which can get some results.
Thank you.
[The prepared statement of Mr. Goldwyn follows:]
Prepared Statement of David L. Goldwyn, President, Goldwyn
International Strategies, Washington, DC
the challenge to u.s. influence
Chairman and members of the committee, it is an honor to speak with
you today about Arica's extractive industries in a time of record
commodity prices. My testimony derives from the energy chapter of an
upcoming book, to be titled ``Africa Policy in the George W. Bush
Years: Critical Choices for the Next Administration.'' The book will be
published by the Center for Strategic and International Studies (CSIS)
in January 2009. My own perspective derives from my experience serving
the U.S. Government in the State and Energy Departments, as a leader in
the extractive industry transparency movement, and as a senior
associate in the CSIS energy program. Today, I will discuss the
implications of the changes in the global energy market for Africa and
the U.S., Africa's role in U.S. energy security, current trends on the
continent, challenges for the new administration, and recommendations
for U.S. policy.
Changes in the Global Energy Market
There have been major changes in the global energy market since
2001--a spike in global demand, led by developing Asia; a 340 percent
\1\ increase in nominal prices, a vast increase in the number of
African countries undergoing exploration and development, and an
increase in competition for access from China and India, with help in
many cases from their governments. High prices have led to resource
nationalism in some countries with reduced access and harsher terms for
the access that remains. Exploration has moved offshore, which has
moved investment away from land-based risk but left thinly protected
offshore platforms exposed to maritime risk. Angola has grown
dramatically as a producer and joined OPEC. Nigeria's production has
risen, but it has also produced one of the global economy's greatest
supply shocks: As of fall 2008 between 500,000 and 800,000 barrels per
day of oil have been shut in at times due to violence in the Niger
Delta. Equatorial Guinea has become a major oil and methanol producer
and is a significant LNG provider to the Atlantic Basin market. Despite
conflict and sanctions, Sudan's production has grown since 2001. Chad
has grown as well.
---------------------------------------------------------------------------
\1\ GIS calculation based on EIA Prices for Cushing, OK, WTI Spot
Prices FOB. (Dollars per Barrel)
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These dramatic changes in the global energy market have been
associated with the diminution of U.S. influence in the region, and
with that loss, an erosion in the ability of the U.S. to promote good
governance, conflict resolution, environmental standards and reduced
corruption. While U.S. influence has diminished, there is now
acceptance in principle by companies and host governments that good
governance, respect for human rights and transparency are the
cornerstones of political stability, a level playing field for
commercial competition and long-term security of investment and energy
supply. The World Bank has begun to engage countries systematically on
reforming the process of energy production--how acreage is allocated,
how products are sold, how refineries are supplied--both to help them
preserve value and reduce corruption. The United States which at one
time led the promotion of voluntary standards on environmental
protection and respect for human rights in security protection, has
become in recent years a marginal player in this international
promotion of good governance and transparency in the extractive
industries.
On critical energy sector issues, U.S. engagement with the
continent has been drastically reduced over the past 8 years. A
continental U.S.-Africa Energy Ministers Partnership has languished.
Binational commissions and policy dialogues with Angola and Nigeria
lapsed. Engagement on the Niger Delta has been episodic and
ineffectual. Engagement of China and Europe--the other two largest
investors in and consumers of energy in Africa--on the impact of
instability and insecurity on global energy markets has been
negligible. The U.S. did not contribute to the international Extractive
Industry Transparency Initiative (EITI) until forced to do so by a 2007
congressional earmark.
As a result, the risks of instability, which were foreseen in 2001
and foreseeable for new energy producers, have not been adequately
addressed. The conflict in the Niger Delta has grown in intensity and
lethality. Angola does not engage with the U.S. on governance and
transparency. Contact with Algeria, Libya, Chad, and Equatorial Guinea,
which was negligible or nonexistent in early 2001, has advanced
significantly, but serious engagement on bilateral or energy issues is
still very modest for countries which comprise four of the top five
suppliers of energy on the African Continent. The potential risk to
Africa's growing list of new energy producers of managing potentially
enormous revenue flows has not yet been considered. There is at present
no policy mechanism structure for the United States to engage Africa's
leading or emerging energy producers in a systematic way.
If the U.S. sees stability in Africa as a national security
priority for multiple reasons--reduction of conflict, counterterrorism,
combating grand crime, eradicating disease, and promoting economic
prosperity in Africa and at home--then it must recognize the need for a
strategic energy security policy in Africa. The challenge for a new
administration is to draw together the many agencies of the U.S.
Government that engage on energy-related issues (State, Energy,
Commerce, TDA, USAID, Defense, Treasury) behind a coherent, cohesive,
and strategic policy and create a central bureaucratic locus of
responsibility capable of identifying the connection between mismanaged
oil and gas revenues and instability. This policy must identify U.S.
energy security interests in Africa, take account of the emerging
trends in the region and the role of other actors, consider what
policies have and have not worked over the past 8 years and earlier,
acknowledge the serious challenges to U.S. interests that loom ahead,
and deploy the human and financial resources to meet this challenge.
II. Africa's Role in U.S. Energy Security
Africa plays a strategic role in meeting global and U.S. energy
security. African producers supply light sweet crude to U.S., European,
and Asian markets. Africa's role in energy security has risen
dramatically since 2001. Sub-Saharan Africa's share of global oil
production has risen from 5 percent in 2001 to 7 percent \2\ in 2007,
while production in the North Sea and other OECD areas has declined.
This growth has come from the dramatic increase in offshore, especially
deepwater, oil production. In sub-Saharan Africa today, the key oil
producers are Nigeria, Angola, Equatorial Guinea, Gabon and Congo
Brazzaville. Sub-Saharan Africa holds 6 percent of global reserves and
3 percent \3\ of global gas reserves. By 2020, 95 percent of regional
oil production will be offshore, and 85 percent of this production will
come from Angola and Nigeria.\4\ Of the 12 top producers of oil on the
African Continent, four are members of OPEC (Algeria, Angola, Libya,
and Nigeria), but all welcome foreign investment.
---------------------------------------------------------------------------
\2\ EIA World Production of Crude Oil, NGPL, and Other Liquids and
Refinery Processing Gains, Most Recent Annual Estimates 1980-2007,
Posted August 22, 2008.
\3\ PFC Energy estimation.
\4\ PFC Energy estimation.
Africa's share of U.S. imports of oil has risen from 15 percent in
2001 to 24 percent in 2007, providing a key source of diversification
of U.S. imports. Nineteen percent of U.S. oil imports from Africa came
from sub-Saharan countries. U.S. imports of natural gas from Africa
have increased nine fold since 2000, from 13 tcf to 113 tcf. The vast
majority of U.S. LNG shipments from Sub-Saharan Africa are from
Nigeria, while most imports from North Africa originate from Egypt and
Algeria.
III. Emergent Trends on the Continent
The global oil market has undergone dramatic changes in the past 8
years, and the impact in Africa has been significant. The rise in oil
prices from an average of $26 per barrel WTI in 2001 to an average of
$114 a barrel for the first 7 months of 2008 \5\ has changed the terms
of producing oil. There has been a reduction in the willingness of many
global producers to expand production. Governments of producing
countries have increased demand for majority control of operations or a
larger share of profits and have come to expect higher earnings from
resource rents. Escalated prices have also led to a rush of new market
entrants competing for access as well as a dramatic increase in the
cost of production as demand for steel rigs and skilled workers has
risen steeply.
---------------------------------------------------------------------------
\5\ EIA Petroleum Navigator, Cushing, OK, WTI Spot Price (FOB)
http://tonto.eia.doe.gov/dnav/pet/hist/rwtcm.htm.
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Africa has been impacted positively and negatively by the changes
in the market. The amount of investment and profile of investors has
expanded, revenue has increased, the number of producers has grown, and
the continent's infrastructure for transporting energy has expanded.
New international voluntary standards for addressing revenue
management, security, and environmental protection have evolved. But
there has also been a rise in expectations of the transformation oil
wealth should bring that has not been met, a failure to address the
security implications of increasingly offshore oil and gas production,
and a real challenge for host governments and competitors in assessing
how to view the nonmarket competition of new entrants to the market
like China and India.
Rising Investment. In a global market where access is increasingly
restricted, Africa is a uniquely open market: Nearly 50 percent of
African production came from international companies \6\ (UNCTAD 2007
Report/Olsen). Nearly every country in Africa with a coast has licensed
some acreage for exploration. While Nigeria and Angola, traditional
large producers, have grown, new major players have emerged: Equatorial
Guinea, which produced just 168,000 bpd in 2000, is now the third
largest producer in sub-Saharan Africa. Exploration has moved from West
Africa to East Africa, with new discoveries in Uganda and Tanzania.
Exploration is under way in Madagascar, and licensing or exploration is
being conducted in Mali, Cote D'Ivoire, Gambia, Guinea, Liberia, Niger,
Rwanda, Gambia, and the Puntland region of Somalia.
---------------------------------------------------------------------------
\6\ UNCTAD 2007 Report/Olsen.
---------------------------------------------------------------------------
Investment levels are rising and moving offshore. According to PFC
Energy, 95 percent of all regional production will be offshore, with 85
percent of total production coming from Nigeria and Angola. Over the
next decade firms may invest as much as $485 billion in regional
exploration and production between 2005 and 2030.\7\ Forty-five percent
of the gross amount of capital expenditures for deepwater oil
development worldwide is likely to be spent in West Africa. Gross
Deepwater Capex expenditure in West Africa between 2008-2015 will
exceed that spent in Latin America, Gulf of Mexico, North Atlantic and
Asia-Pacific.
---------------------------------------------------------------------------
\7\ IEA World Energy Outlook 2006, p. 77.
---------------------------------------------------------------------------
Africa's natural gas sector is positioned to expand in the coming
years, particularly through the expansion of liquefied natural gas
(LNG) capabilities and facilities. Africa has 211 trillion cubic feet
(tcf) of natural gas reserves. Investments in LNG have been made in
Algeria, Libya, Egypt, Equatorial Guinea, Angola, and Nigeria.
Advancements in LNG will enable the continent to serve as a welcomed
alternative supplier of gas to Europe, the U.S., and the Asia-Pacific
region; as well as to meet gas flaring reduction objectives. However,
proposed projects are expected to face multiple delays due to cost
increases; security, social and environmental concerns; feedstock
uncertainty; rising domestic demand and negotiations over project
terms.
New Investors. As global demand for oil and gas have grown,
competition in Africa's energy sector has expanded from U.S. and
European firms to new competitors. Africa is no longer the province of
major international oil companies; literally hundreds of smaller
companies, mostly private, are exploring the new energy frontier
nations and taking over mature properties.
The Asian Presence. The presence of Asian. investors and energy
companies on the continent has risen dramatically, in tandem with
rapidly growing demand for oil and gas in developing Asia. The major
Chinese national oil companies (CNOOC, CNPC and Sinopec), Malaysia's
Petronas, and India's ONGC have all purchased equity shares and bid for
new licenses in Africa. On an economic level, fear of Asia's domination
of the African energy sector is highly premature. The real concern over
the rise of Asian NOCs therefore stems from anxiety over a number of
their business practices that negatively impact competition and the
long-term stability of producing countries. So far, Asian NOCs have
placed commercial concerns over humanitarian concerns and have failed
to incorporate into the norms of their overseas operation the long-term
risks of disregarding governance, environmental and human rights
concerns. These investments have enabled Sudan to grow its production,
enjoy substantial oil revenues, and withstand robust international
pressure to end the genocide in Darfur and fulfill its obligations
under the North-South peace accords. Western companies are growing
distressed at the way Chinese NOCs compete. Their ability to draw on
nonmarket tools such as government funds to finance acquisitions, and
to offer package deals involving construction of roads, soccer
stadiums, or railways as a sweetener make competition for acreage
unfair from a Western point of view. (From an African point of view,
these projects address their own lack of administrative capacity.) When
companies are able to acquire acreage without a tender that meets
international standards, the nascent trend toward enforcing these
standards in countries like Nigeria and Congo Brazzaville is
undermined.
No Asian NOC yet participates in any of the voluntary standards
created by Western governments to foster improved governance,
consideration of environmental impacts, and respect for human rights in
oil and gas investments. Moreover, the ability of other nations, such
as Angola, to decline to participate in those standards and maintain
opaque financial practices is reinforced. From the perspective of U.S.
interests, the need for these standards is fundamental to the long-term
security of these nations, and also to energy security. These concerns
should be of much interest to China as they are to the U.S.
Emergent Risks. With the prospects of enormous investment,
production, and revenue come major risks. In oil resource rich
countries in Africa, the emerging and largely unaddressed risks
originate from: Unattainable expectations, rent seeking, corruption,
the erosion of nascent good governance efforts, the lack of capacity to
manage such large revenues effectively, security threats to operations,
rising resource nationalism and political instability.
With the promise of high oil and gas revenues comes rising
expectations of poverty reduction and prosperity. In frontier countries
these expectations are almost always unfulfilled, as 8 years or more
can elapse between the first exploration agreement and a profit return
to the overnment when hydrocarbon production commences. In cases like
Sao Tome and Principe, where prospects for production attracted
enormous press attention, one major coup attempt, and robust program of
bilateral advice on revenue management; actual exploration produced
disappointing results. The recurrent issues of whether the field will
deliver and whether the government will put revenue management measures
in place before the revenue comes in will evitably surface in Ghana and
as well as other frontier states unless these issues are properly
addressed.
For established players like Nigeria and Angola, Equatorial Guinea,
Gabon and Congo Brazzaville, the question is whether the flood of
revenues will be put to good use, or whether rent-seeking by members of
the government will foster corruption and kill even nascent efforts to
prove governance. In Nigeria, trends are rapidly on the downslide. Even
in the waning days of the reformist Obasanjo administration, which
introduced landmark reforms in revenue transparency, procurement, and
civil service reform, questionable licensing rounds were offered here
technically unqualified bidders won access to acreage. Blatant defects
in sector management, from the failure to meter oil to the failure to
measure the match between refinery inputs and outputs, were left
unaddressed. The Yar'adua government did not constitute the NEITI
Board, as required by the country's NEITI law, until January 2008 and
it has already failed to comply with the legal requirements to audit
2006 and 2007 extractive industry revenues. The country is in a deep
political crisis and the prospects for implementing procurement,
transparency, or energy sector reforms are negligible. The Niger Delta
crisis has become an international crisis, and efforts within Nigeria
to even strategize a solution are nearly paralyzed.
Equatorial Guinea is making nascent efforts to constitute an EITI
program and to obtain outside help for identifying social investment
projects. It has also been cooperating with the IMF and publishing
results of its annual IMF article IV reports. Time will tell whether
Equatorial Guinea will move from candidate to compliant status under
EITI, whether social investment projects will be implemented, and if
efforts to foster a civil society in Equatorial Guinea capable of
participating in governance efforts will evolve. U.S. industry, NGOs,
and the World Bank are all engaged.
Angola is a mixed case. While Angola does not participate in
voluntary initiatives, driven by its motivation to soon access
international capital markets, Sonangol publishes its production with
regularity. The Angolan Finance Ministry has accepted a program with
the IMF to monitor and manage oil revenues, and Angola's tender system
is viewed as transparent and fair. But the Angolan model raises
concerns for future caution. As Angola grows its own private sector
with companies who will create value in Angola by providing oil sector
services and other related enterprises, there are reports that the
companies themselves are owned by current members of the Angolan
Government or Sonangol, raising concerns for U.S. companies under the
Foreign Corrupt Practices Act.
Security risks are on the rise as well. The most acute and obvious
is Nigeria. The continued failure of Nigerian governments to
effectively address the Niger Delta crisis has led to an unprecedented
level of lethality and disruption. Attacks on offshore facilities,
thought to be beyond the range of the Niger Delta militants, took place
in June 2008. Kidnappings and murder continue. Cameroon and Equatorial
Guinea both suffered bank heists liked to Niger Delta crime
organizations and EG faced at least three coup attempts in 5 years,
including one major foiled attempt led by Simon Mann and Mark Thatcher.
While investment is moving offshore, none of the littoral states have
effective navies or coast guards with which they can even identify,
much less deter or repel pirates or attackers.
Rising resource nationalism also raises risks that investment
levels will be below expectations and revenues will fall as a result.
While the nation's motives are understandable, they can produce
unwelcome results. In Nigeria attempts to define local content by who
owns a local service company, rather than how much value is created
locally, have simply led to shell companies of mysterious ownership who
transfer their service obligations to other companies or simply do not
perform the work.
The broader risk is the instability that the confluence of the
above factors can produce. Unprecedented oil and gas revenues across
the continent have not yet produced the investments in physical
capital--roads, power stations, schools and hospitals--or human
capital--primary and secondary education, vocational training,
enterprise management, and development of civil society--that will be
required for social peace. Some countries, like Libya, Equatorial
Guinea, and Ghana, are at the beginning of major investment programs.
Their progress will be measured soon. But more mature producers, like
Nigeria, Algeria, Angola, Congo, Gabon and Chad, face impatient
populations with expectations of better results. This opens the door to
external adventurism, as we now see with al-Qaeda in the Maghreb in
Algeria, and internal conflict as we have seen in Chad, Mauritania, and
Nigeria.
IV. Challenges for a New Administration
A new administration will face several challenges in the Africa
energy space: The crisis of corruption in Nigeria, diminished U.S.
influence on the development path of current and emerging producing
countries, the need to secure offshore investments and the competition
over investment values and standards.
Nigeria. The most critical challenge to U.S. policy will be how to
engage Nigeria. Nigeria's size, its role as an energy producer of
global stature, its cultural ties and its potential to be the economic
engine of West Africa should put it at the top tier of U.S. foreign
policy priorities. Multiple issues must be addressed. The Niger Delta
conflict poses physical risk to U.S. and Nigerian citizens in the
Delta. The militants are well armed and are reportedly exporting
weapons and crime to neighboring countries including Cote D'Ivoire,
Cameroon, and Equatorial Guinea. If Nigeria's shut-in oil production
were restored, it could add up to 650,000 barrels per day of oil to the
global market, dropping prices nearly $17 on its own. Nigeria could be
a major source of LNG supply to Europe, Asia, and the U.S. But
unaddressed, the Niger Delta conflict will lead to sustained shut-in of
onshore production. The deep corruption in Nigeria overall must be
addressed as well. Investment will fall in Nigeria as it appears that
every aspect of the energy procurement process, from the leasing of
acreage, to local content mandates, to the sale of crude for product
risks engagement with Nigerian Government officials.
Declining U.S. Influence. If the U.S. is to influence the
development path of current producers like Angola, Chad, Nigeria,
Equatorial Guinea, and emerging producers such as Ghana and Madagascar,
we must have a respected voice in those countries. The U.S. has left
the field in many of these countries entirely, and in countries where
we do engage, we do not engage them on their own economic agenda. We
will not be heard on the issues of investing resource revenues in
physical and human capital or avoiding the management of overinflating
economies if we do not have relationships of respect with the countries
we wish to influence. U.S. advocacy for access to acreage, conducted at
the head-of-state level by most U.S. competitors but rarely a priority
for U.S. administrations, is best affected not by a demand for access,
but by a relationship of mutuality between the U.S. and the host
country. Traditionally, the U.S. and international institutions have
effectively used their financial clout as leverage to compel developing
countries to implement policies aimed at sustainability and stability.
But new centers of wealth in Asia and the Middle East combined with
unprecedented windfall profits in producing countries have diminished
the influence of loans and foreign aid. The U.S. will need a more
nuanced approach to engagement since resource rich countries now have
ample funding on their own or through unconditional loans from China.
Security of the Offshore. If 95 percent of all energy production in
West Africa will be offshore by 2010, there will be a need both for the
U.S. to monitor international waters, and for countries to have the
wherewithal to see who is in their water, interdict pirates and
criminals, and deter attacks on facilities to protect the lives of
workers. An investment both of time and revenues will be required to
attract those countries that will create security forces with respect
for human rights.
The Competition for Values. The U.S. will compete with China, and
possibly Russia, for influence in Africa. U.S. companies will come with
a package of values attached to their operations: Compliance with
anticorruption laws, participation in voluntary standards on human
rights security and transparency, and investment in health, safety, and
environmental practice. Their competition may not have these values or
these conditions attached to their investment. Indeed, the great
challenge that China poses to U.S. and European investment in Africa is
not domination of acreage (their share remains minimal) but the refusal
so far to participate in international standards, which erodes the
incorporation of these standards into host country practice. Russia has
now made its bid for access to Nigeria's gas to further increase its
dominance of Europe's gas supply. Protection of these values will
require engaging China, Malaysia, Russia, and others on both the need
for these standards and their contribution to global energy security.
The U.S. will need to also engage Africa on these issues and make it
clear that it is a priority of the U.S. Government to advocate these
values and, where it is welcome, to provide assistance to countries
adopting and implementing these standards.
V. Recommendations
Our preliminary recommendations for addressing these challenges
are:
1. Promulgate a Policy Decision Directive on African energy
security. There must be a policy directive from the President that
explicates U.S. interests and priorities and directs agencies to
coordinate and support it. This policy must include the role of
diplomacy, security assistance, governance and transparency promotion,
human rights, and development assistance.
2. Provide White House leadership. The coordination of energy
security policy must come from the White House to muster the disparate
agencies behind a policy. While this person might usefully coordinate
energy security policy in other regions as well, there must be a person
with the rank, status, and mission to ensure the implementation of the
President's policy. In addition, most African energy producers either
manage or reform energy policy at the head-of-state level. There must
be a counterpart level of engagement from the U.S.
3. Apply State Department diplomatic resources to energy security.
The State Department must play a key role in engaging countries both on
access and reform. While major companies do not always request advocacy
from the U.S. Government, in today's market, heads of state of their
competitors advocate vigorously. Small and mid-size U.S. companies
would welcome a restoration of the U.S. Government's role as commercial
advocate where appropriate. Engagement on reform must be at high levels
and with multiple ministries. U.S. diplomatic resources must be applied
at both a senior level, to engage other ministers, and at the bureau
level, to provide programmatic support. The U.S. needs more diplomats
on the ground in developing countries, more eyes and ears in the
producing regions, and more high-level diplomats focused on energy
issues. Historically the State Department denotes this priority by
appointment of a special ambassador, as it has for the Caspian region,
or by directing an Under Secretary (in this case the Under Secretary of
State for Economic Affairs) to place a priority on promotion of a
policy. This kind of issue is better addressed by recruitment of
officials who have the mission to promote the policy than by changes in
the State Department's organizational structure, but with respect to
energy security policy one of these options should be considered. In
addition, the Department needs to collect more data on energy
developments, as well as political developments, in producing areas.
4. Give governance and transparency policy a bureaucratic home. At
this time there is no office with dedicated responsibility for the
promotion of good governance and transparency in energy producing
countries. The Democracy and Human Rights bureau owns some policies,
such as the voluntary principles on energy and security. The Economics
and Business Bureau has at times staffed the EITI at a junior level,
but so has the Policy Planning Office. In the sprit of integrating
economic and governance issues rather than stovepiping them, we should
place this responsibility in the Economics and Business Bureau.
5. Engage Africa on its own energy and economic agenda, not just
ours. The best way to enhance U.S. influence with Africa's energy
producers, and to promote U.S. interests in both access and governance,
is to engage governments on what interests them, not just what
interests us. Most producers want to create jobs, promote economic
development and enjoy a respectful, mutual relationship with the U.S.
Nearly every country is trying to find ways to increase power
generation and distribution in an affordable, sustainable way. Many of
them struggle with ways to target subsidies for fuel or power for the
poor rather than the entire economy. The U.S. could use a range of
tools to engage different countries, depending on our interests and
their needs. These could include reviving the U.S. Africa Energy
Ministers Partnership; reviving or creating bilateral multiagency
economic working groups with Nigeria, Angola, Algeria, and Libya; and
creating an electric power policy partnership--``Power for the
People''--to engage countries on power pooling and smart policies. The
prudent use of development aid to provide technical assistance to those
who seek help in redesigning their procurement systems, or auditing
their national and international oil companies, or designing systems
for metering production, should be helped.
6. Focus development and technical assistance on governance. U.S.
investment in governance in general and energy governance in particular
is modest. USAID, in coordination with the World Bank and other
development agencies, should be directed, with a $500 million fund to
back its commitments, to support EITI in countries which are
candidates, to consider assistance to countries interested in reforming
the governance of their energy sector from procurement to local content
to regulation, and to support civil society groups in general, in a way
that helps these groups and their media understand the extractive
industries and participate in indigenous reform efforts.
7. Sustain efforts to promote maritime security. Led by NAVEUR, one
of the most successful efforts of the Bush administration has been the
engagement of African nations on enhancing their own capacity to
identify ships in their waters and police them to protect their
fisheries, deter crime, and protect investment in their waters. This
engagement has been tempered by a requirement that countries be willing
to engage on NAVEUR's terms, which call for improvement of policy, not
unconditioned security assistance. With the advent of Africom, this
effort can be the key to securing energy investment abroad. If Nigeria
reaches a point where it will seriously engage on this issue, it could
lead to the containment of oil bunkering as well.
8. Procure a National Intelligence Estimate on African Energy
Security. U.S. policymakers rarely see the linkages between energy
production, instability, conflict and stability of supply. An NIE of
African energy would identify these linkages and provide a common
understanding of the potential for conflict that rising prices (or
sharply falling prices) and new exploration might pose for the
continent.
9. Engage Europe and Asia on Africa issues. Europe and Asia have as
great a stake in African development, stability, and energy security as
the U.S. does. We need to revive conversations on these issues in
general through a transatlantic dialogue and high level U.S.-China and
Asia-Pacific cooperation.
10. Engage on the Niger Delta. The U.S., EU, and China must engage
Nigeria on the crisis in the Delta. The key to the crisis is the lack
of political legitimacy of the leadership in Nigeria itself. But as
friends and partners the U.S. must make clear that the conflict has
become an internal as well as an international crisis. Crime is
spreading. Nigeria's democracy is under attack. Money is not the core
of the problem, as there are ample funds at the federal and state level
for a development plan. But without a serious political dialogue,
perhaps supported quietly by external partners, no progress will be
made. No serious political progress is possible unless corruption is
addressed. To date, Nigeria has taken greater steps on transparency and
reform than any other African nation. But if it does not fulfill its
nascent commitments, efforts to get smaller countries to adhere to
stricter standards are destined to fail.
VI. Conclusion
Mr. Chairman, as you can see from this lengthy analysis, there is
much to be done regarding U.S. energy policy toward producing states in
Africa and to address the problem of the resource curse. It will
require new approaches to energy and foreign policy. It will require
fresh policy approaches, money, and creative diplomacy. But more than
anything it will require leadership. As a citizen, I thank the
committee for its leadership on this critical issue.
Senator Feingold. Mr. Goldwyn, thank you for your excellent
testimony.
Before I turn to Professor Collier, I try to be careful not
to repeat old war stories from foreign trips, but when I was in
President Dos Santos' office in 1994, I talked to him about his
rating on the Transparency International index, which of course
was abysmal. He listened and I thought that would be the end of
that. I came back 5 years later. He brought up to me--somehow
they had done the job and kept the notes--that they had gone up
6 points. It's still pretty bad. But think about the power,
that that's the one thing he wanted to impress upon me, whether
people believe that these indexes really work and so on. I was
really struck that EITI presents a very dramatic opportunity to
engage countries in trying to get their reputation to improve.
So I thank you for that.
Professor, it's a delight to have you here. You may
proceed.
STATEMENT OF PAUL COLLIER, DIRECTOR, CENTER FOR THE STUDY OF
AFRICAN ECONOMIES, UNVERSITY OF OXFORD, OXFORD, UNITED KINGDOM
Mr. Collier. Thank you very much for inviting me.
To state the obvious, the present commodity boom is the
biggest opportunity for transformative development that parts
of Africa have ever had. There are also big potential risks.
Just to elaborate on those two points, the global evidence on
the link between sort of commodity revenues and economic
development is that the normal pattern is in the first few
years of higher commodity prices countries grow faster. They
grow faster whether they're well governed or badly governed.
They grow faster. You can't help but grow.
But if you come back in 20 years, usually what's gone up
has come back down. Not always. It seems to depend
statistically upon the initial levels of governance. Governance
really seems to matter.
The old concerns of Dutch disease, which were very much
macrotechnocratic, we now as economists tend to think it's more
of a political story. It's not an inevitable process, as Dutch
disease. It's an optional process depending on governance.
When we focus not on economic development, but on conflict,
we get a similar pattern. Higher commodity prices do seem to
increase the risk of violent conflict, unless there's good
governance. If there's good enough governance, you don't get
that effect.
It's vital that history does not repeat itself. The
commodity booms of the 1970s led to little in the way of
sustained development and quite a bit extra conflict. So we
must do what we can to avoid history repeating itself.
What we can do is quite limited because we don't have
anything like hard power in these situations. So conditionality
won't work, precisely because these governments have lots of
money. So the only approach I think is to see what the
international community can do to strengthen the capacity of
the societies within these countries to get what they
themselves want. It's their money ultimately.
The approach that I think is entirely the right approach is
voluntary international standards, which then guide societies
into what provides information for them and guidance on what
matters. EITI was exactly the right place to start: Get the
basic information to the society on what money is coming in.
Without that, what can society do? So EITI was the right place
to start.
The success of the EITI--and it has been remarkably
successful--demonstrates that that approach works, but it will
be the wrong place to stop. That's why we've got EITI Plus
Plus. What are the ``plus plusses''? Well, what is governance
here? I said governance matters and the natural tendency is to
think that what governance means is corruption. In part that's
right, but there's much more to good economic governance than
avoiding corruption. You've actually got to take sensible
economic decisions as well as honest ones.
In harnessing the commodity boom for sustained development,
there are a lot of difficult economic decisions. There are
upstream issues, there are downstream issues.
I'll just close with one upstream and one downstream.
Upstream, how do you sell the rights to the discovery process
and the extraction process? My own belief is that we need to
use auctions much more than we have done in the past. Auctions
address two problems. One is the problem of agency, which is a
corruption problem.
But the other is they address the problem of information.
Governments are pretty clueless on what these things are worth.
Companies have an informational advantage. The attraction of
auctions is the government doesn't need to know. The true value
is revealed by bidding amongst informed competitors. So the
auction solves the asymmetric information problem.
If we go downstream, the key decisions are how much of the
revenues should be saved relative to consumed--the answer is a
lot should be saved, but by no means all of it. So neither the
Norwegian model, which is far too high a savings rate for low-
income countries, nor to throw a consumption party are the
right answer.
Finally, of the savings, what should you do with those
savings? Definitely not the Norwegian model--give them to your
wise New York banks--and that is not a comment on the wisdom of
the banks. It's that the African governments--unlike African
countries, unlike Norway, are desperately short of capital in
their own societies. So they need a process of domestic
investment. The key issue in harnessing these booms is to get a
good domestic investment process going. It's very easy for that
domestic investment process to be both corrupt and foolish. So
raising the quality of domestic investment is the heartland of
the issue.
Thank you very much.
Prepared Statement of Paul Collier, Director, Center for the Study of
African Economies, University of Oxford, Oxford, United Kingdom
Laws and Codes for the ``Resource Curse''
1. introduction
The international community assigns a high priority to helping
impoverished societies, yet its efforts are currently lopsided. While
it spends around $100bn on aid and provides over 100,000 U.N.
peacekeepers, to date it has largely neglected the potential of
international codes and laws to raise standards of economic governance.
This paper analyzes the potential contribution of such codes and laws
to increase the development impact of natural resource revenues. The
current commodity booms make this a critical opportunity for
assistance.
Resource-exporting developing countries are currently in the thraws
of booms that were last seen in the 1970s. Many of these countries have
been impoverished and economically stagnant for decades and the booms
constitute extraordinary opportunities for development. The revenues
are often large enough to finance transformation, dwarfing aid flows.
However, the last global commodity boom of the 1970s largely failed to
deliver transformational development. On the contrary, on the whole its
long-term economic consequences were highly adverse. The failure to
harness the booms of the 1970s was the result of wrong decisions on the
part of governments. In part, these wrong decisions were mistakes: The
decision-takers would have arrived at different decisions had they
realized their consequences. In part, however, they reflected
divergences between the interests of the society and of the decision-
taker: The incentives facing the decision-taker were misaligned with
the social interest that the decision-taker was empowered to represent.
This distinction between mistakes and misaligned incentives is
fundamental as a guide to the actions that can prevent history
repeating itself. Mistakes are to an extent self-correcting through
learning, whereas misaligned incentives require changed incentives.
Even where past decisions were mistakes, international codes can be
helpful. The typical low-income commodity exporter has remained prone
to mistakes in economic policy because the cadre of well-trained
decision-takers within the society is still tiny. Adult populations are
small, few people get international graduate education, and few of
these people return to their country: Globalization is accelerating the
emigration of the highly skilled. Even among this limited pool, few are
in positions of influence: The salaries of senior civil servants have
been radically eroded. Further, because the adverse consequences of
mistakes in managing commodity booms occur only long after the
decisions, it is easy for a society to misdiagnose its problems. The
typical mistake of the 1970s booms was to gear them up by borrowing and
consume the proceeds. When commodity prices crashed this led to a phase
of crisis management termed ``structural adjustment.'' Nigerians, for
example, generally see the boom period as the ``good times,'' and blame
their current poverty on ``structural adjustment.'' Thus, the process
of learning from mistakes can usefully be complemented by external
guidance. International codes can be helpful: They get noticed, and
their official status signals that they have been subject to a
reasonably rigorous process of scrutiny and assessment and so should be
taken seriously. Even where such codes are entirely voluntary, they can
change behaviour.
Where wrong decisions were the result of misaligned incentives
rather than mistakes, the incentives have to be changed. While in
principle, incentives can be changed both by penalties and rewards, in
the case of decisions appertaining to resource revenues the key changes
are likely to come from new penalties. This is because the private
rewards for socially costly decisions are usually too high to be
countered by even higher rewards for good decisions. The terrain of
penalties opens up a role for the law. Legal process is not the only
means by which penalties can be introduced, but it is likely to be a
critical part of solutions.
In section 2, I review the evidence on the resource curse and its
causes, including a prognosis for the long-term consequences of the
present commodity booms should patterns of behaviour stay unchanged.
The key conclusion from this section is that were behaviour patterns to
stay unaltered the present booms would be a missed opportunity of quite
staggering proportions. The issue under discussion is undoubtedly the
single most important issue for the development of the countries now
stuck at the bottom of the global economy: The ``bottom billion.'' In
section 3, I anatomize the decision process by which valuable natural
resources in the territory of the society are harnessed for economic
growth that benefits the society. I delineate five key decisions. For
each I consider whether past failures were predominantly due to
mistakes or to misaligned incentives. In section 4, I turn to the scope
for new international voluntary codes. Primarily, these address those
errors due to mistakes although they can also help to realign
incentives. In section 5, I turn to the potential need for new laws the
national promulgation of which would be coordinated across the OECD
analogous to antibribery legislation. Such laws are difficult to
introduce and so are a last-resort approach for the realignment of
incentives. Section 6 concludes.
2. the resource curse and its causes: the evidence
The ``resource curse'' is evident from particular situations, such
as Nigeria since the discovery of oil, but as a general proposition
about those countries that export primary commodities it has been more
controversial (Auty, 2001). Counter examples to Nigeria, such as the
rapid growth of Botswana since the discovery of diamonds, demonstrate
that any resource curse must be contingent. Further, there was an
apparent discrepancy between two different types of general (that is,
statistical) evidence. The main general evidence came from a study by
Sachs and Warner (2001) which showed that using cross-section
comparisons resource riches were damaging. Cross-sections essentially
compare the overall experience of one country with another. Economists
have, however, come to doubt such evidence where it is used to
investigate processes that occur over time, because it is easy to
misattribute to temporal processes what are in reality underlying
differences between countries. Evidently, the resource curse is such a
process: Resources are discovered and this produces various changes
which eventually damage the economy. These ubiquitous suspicions of
cross-section analysis appeared to be confirmed in the case of the
resource curse by time series analyses by Deaton and Miller (1995) and
Raddatz (2007). Time series analysis relies upon before-and-after
situations in each country and so is better suited to temporal
processes such as the resource curse. They found that the consequences
of a commodity boom looked on average to be entirely benign on various
economic criteria. However, an acknowledged limitation of their method
was that it could only investigate the first few years following a
boom. My own recent work with Benedikt Goderis has reconciled this
apparently conflicting evidence (Collier and Goderis, 2007a, 2007b).
Using the statistical technique of cointegration we are able to analyze
both the short-term and the long-term effects of commodity booms using
data for virtually every country in the world, and spanning the period
1970-2003. Our results confirm that in the first few years price booms
benefit the overall economy. However, after around 20 years the effects
are often highly adverse. Simulating the current commodity booms in the
14 major African commodity exporters, we find that the long-term effect
is to reduce output relative to counterfactual by around 25 percent.
The resource curse is a reality.
The adverse long-term effects are confined to price booms in
nonagricultural commodities. A likely explanation for this is that
agricultural booms accrue predominantly to farmers who usually use
their windfalls sensibly. In contrast, nonagricultural booms usually
accrue predominantly as government revenue. The current commodity booms
are nonagricultural and we investigate whether such booms inevitably
lead to the resource curse or are themselves contingent. We find that
they are contingent upon initial conditions of governance: Above a
threshold level there is no resource curse. Thus, for example, Norway
has been able to benefit from its oil not only in the short term but
has harnessed the revenues for long-term growth. Our measure of
governance is taken from the International Country Risk Guide, a
commercial rating agency. On this measure, the threshold level below
which the resource curse sets in is approximately equivalent to the
governance standards of Portugal in the mid-1980s. Unfortunately,
almost all of the current commodity booms in low-income countries are
occurring in environments where governance is below this threshold.
This emphasis upon the importance of governance in the management of
resource rents is consistent with a recent analytic literature which
models the political economy of the resource curse (Arezki and van der
Ploeg, 2007; Baland and Francois, 2000; Hodler, 2006; Mehlum, Moene and
Torvik, 2006; Robinson, Torvik and Verdier, 2006).
Governance is, however, multifaceted and in one important respect
it has manifestly improved in the resource-exporting countries since
the 1970s. Following the collapse of the Soviet Union there was a waive
of democratization and so they are now more democratic. With Anke
Hoeffler I have investigated whether democracy improves the economic
performance of resource exporters (Collier and Hoeffler, 2006). We find
that whereas in other economies democracy has such an effect, in the
resource exporters' performance is significantly worse. In effect,
instead of democracy disciplining the decision process, the resource
revenues undermine the democratic process. We decompose democracy into
two facets: Electoral competition and checks and balances. The economic
damage done by democracy comes from electoral competition and is offset
if checks and balances are sufficiently strong. The instant democracies
of the 1990s have electoral competition without checks and balances
because the latter are much more difficult to establish. As Iraq and
Afghanistan demonstrate, elections can be introduced rapidly in any
society because they are events and the incentives for parties to
participate are strong. In contrast, effective checks and balances are
processes, and since their purpose is to limit power the powerful have
little incentive to build them. An implication is that the waive of
democratization has not improved governance to the level at which the
incentives of decision-takers are now well-aligned. Other approaches to
the improvement of governance in the low-income resource exporters is
thus likely to be critical to whether history repeats itself.
3. mistakes and misaligned incentives: five key decision points
The dismal outcome of commodity booms to date reflects either
mistakes or misaligned incentives and in principle either of these
could predominate in the poorly governed countries. To analyze these
two possibilities I focus on five decisions that are jointly critical
in harnessing a commodity boom for broader growth across the economy.
Decision 1: Negotiating the resource extraction contract
In developing countries resource extraction rights are invariably
vested in the government. Because governments lack the organization,
skills, and capital to undertake extraction themselves, it is
appropriate to sell these rights to resource extraction companies. The
first critical decision is how these sales should be conducted.
The government has one major advantage: It is usually the monopoly
seller of the nation's resources. The exception is where rebel
organizations control some of the national territory and in effect
compete with the government in selling rights. For example, this was
for many years the situation in respect of Angolan diamonds. When Jonas
Savimbi, the head of the Angolan rebel organization, was killed, an
event which marked the end of divided control of the nation's
resources, the stock price of resource extraction companies doing
business in Angola fell on the New York market by 4 percent. Asset
holders recognized that the move to monopoly would worsen the
bargaining position of companies and that this would more than offset
any material benefits of peace.
However, the government has two major disadvantages: It has less
information that a resource extraction company as to the likely value
of extraction rights, and it has a more severe ``agency'' problem. The
former generates mistakes, whereas the latter generates misaligned
incentives. As a first step in reducing the information asymmetry the
government can invest in a geological survey, so that the uncertainty
over the value of the rights is reduced. Where good geological
information is available, the next and key step is through an auction.
An auction reveals value through competition among informed companies:
The government itself does not need to know the value of the asset it
is auctioning. The most celebrated instance of the benefits of
auctioning rights is the sale of the rights to the third generation
mobile phone network in the U.K. The British Treasury was about to sell
the rights in a negotiated deal for 2bn when it was
persuaded to rely upon an auction instead. The auction revealed a price
of 20bn. If the British Treasury can so radically
misestimate value, it is evident that the typical African Ministry of
Finance does not have the core competence to negotiate satisfactory
deals. The amount of information revealed by an auction depends both
upon the details of its design and the integrity with which it is
conducted. For a discussion of a design appropriate for a resource
auction see Cramton (2006). The integrity issue is taken up below.
The agency problem facing governments is that the power to
determine deals is delegated to some agent of government, typically the
Minister of Industry or the President. Resource extraction companies
thereby have the opportunity to arrive at a deal which is personally
rewarding for the agent of government, and for the company, at the
expense of the society. Again, auctions are potentially the solution to
this agency problem. However, auctions can easily be gamed. To prevent
this, auctions would need to meet certain specified standards, and
adherence to these standards would in turn need to be monitored through
a process of international certification.
Currently, many African governments are entering into packaged
deals, usually with China, that combine resource extraction rights with
construction contracts. Such packaging has some organizational
advantages. It is, however, entirely compatible with an auction
process: The auction can specify that the government wants the package.
Resource extraction companies would then team up with construction
companies and potentially also with their national aid agencies to
submit a joint bid. An advantage is that bids would then be comparable.
Decision 2: Design features of the contract
The second critical decision concerns the specification of the
rights that the government proposes to sell. Extraction rights have
three key dimensions, their duration, the tax regime that will be
applied, and the credibility of these commitments. The third of these
dimensions is the core of the matter.
Because the government is sovereign it can change the terms of any
deal that it strikes. This gives rise to a ``time-consistency''
problem: The inability of the government to commit induces extraction
companies to discount its offer. The problem is far more acute for
governments that start with a weak reputation as is normal across
Africa. In this case, if the government reneges it suffers only a small
loss of reputation. The problem is particularly severe where no
geological survey is available or planned, so that prospecting rights
are inevitably highly speculative. The government cannot credibly
commit to refrain from changing the terms of the deal should the
company strike lucky.
The approach usually urged by the international financial agencies
in such situations has been to encourage governments nevertheless to
offer long-term contracts, and then, should companies strike lucky, to
advise governments not to renege on their terms. The intention is that
governments should gradually build their reputations to the point at
which their commitments would be credible. Such advice seems to me to
be seriously mistaken in two respects.
First, governments with poor reputations that offer long-term
contracts for highly speculative outcomes will receive only offers that
include a heavy discount for the likelihood that they will renege. In
effect, the company works on the assumption that the contract will be
changed. If, subsequently, the government fails to change the contract
it hands the company a windfall over-and-above the expected return.
Conversely, if the government indeed reneges on the contract, it incurs
a loss of reputation which would not have occurred had it not made the
commitment. The alternative is for the government to offer for sale
only rights that extent over a limited time horizon. It can further
reduce the need to renege on a contract by designing its tax system so
as to be heavily geared upon the level of rents. Thus, flat rate
royalties should be avoided. Taxation should start only above some
threshold world price at which the firm is making normal profits and
rise steeply as the price increases above that threshold. Both features
reduce the incentive for the government to renege on the contract
should the company strike lucky. They thereby increase the confidence
of the company that the terms of the contract will be respected and so
reduce the discount that is built into its offer.
However, the key reason why the advice is mistaken is that the
incentives for governments already tempt them to offer contracts with
horizons that are too long and tax regimes that are too generous. By
designing contracts in this way governments increase current revenues
at the expense of revenues in the future when the current group of
ministers may not be in power. This misalignment of incentives is at
its most acute in transitional governments which are common in post-
conflict situations. For example, the transitional government of the
Democratic Republic of the Congo knew that many of its members would be
out of government after the post-conflict elections, scheduled for
2006. In the preceding 3 years long-term rights to mineral extraction
were sold off under a very generous tax regime. For example, during
2006 mineral exports are estimated to have been around $200m whereas
royalty payments received into the government budget were a mere
$86,000. The prices at which these rights were sold were inevitably
heavily discounted by the lack of credibility of the regime's
commitments. Similarly, while it was still a rebel organization, the
current government of Congo Brazzaville is believed to have sold ELF
the long-term right to oil at a heavily discounted price in return for
financial support in its subsequently successful military struggle.
Analytically, these sales of extraction rights were equivalent to
incurring international debt at very high interest rates, something
that would not have been permitted by the international community.
The appropriate specification of the rights to be sold thus depends
upon political as well as geological considerations. While a mine might
have a natural life of 30 years it will often be economically
disadvantageous for the society to sell extraction rights over such a
long horizon. It may be preferable to incur the extra transaction costs
implied by rights that are shorter than the natural life of the
investment.
Decision 3: Transparency in revenues
The third critical decision is the degree of scrutiny of revenues.
Until the Extractive Industry Transparency Initiative (EITI) which
started in 2002, revenues paid to governments by resource extraction
companies were usually confidential. This lack of disclosure gave rise
to two abuses: One by companies; the other by government officials.
Most revenue-receiving governments have little capacity to scrutinize
whether payments by companies are fully compliant with tax regimes.
However, once payments are made public companies are potentially
exposed to a greater degree of scrutiny and are more likely to be
voluntarily compliant. The abuse by government officials is that
payments that should properly accrue to the budget instead are
improperly diverted. Indeed, the key impetus for the EITI was the
evidence from the IMF that some $2bn of oil revenues that should have
accrued to the Angolan budget were missing. The scrutiny of government
by citizens depends upon information. This is exemplified by the
decision of the Nigerian Federal Government to implement the EITI at
the level of the 36 states within the federation which between them
receive half of the oil revenue. The Federal Ministry of Finance
decided to publish in the newspapers the monthly oil revenues sent to
states and handled by state governors. On the day of first publication,
newspaper circulation in Nigeria spiked: Citizens wanted to hold their
officials to account. The benefits of the EITI already extend beyond
Africa: It has substantially improved the management of resource
revenues in Russia and central Asia. [Here I rely upon the opinion of
Eric Bergof, Chief Economist of the European Bank for Reconstruction
and Development.]
An even more fundamental abuse of resource revenues is when they do
not accrue to the government in any form but are instead paid to rebels
who control part of the national territory. This was, for example, the
case for many years with diamonds sold by Savimbi's rebel organization
UNITA. The international community faced up to this problem at around
the same time as EITI through a voluntary system of certification of
the provenance of diamonds, the Kimberley Process. This has already
proved highly successful in curtailing rebel access to the world
diamonds market and the effectiveness of scrutiny is steadily being
increased. The system is also being considered for a few other high-
value commodities such as coltan.
The opacity of resource revenues and their theft by rebel groups
are not mistakes. Evidently, they are the result of misaligned
incentives: Opacity and theft benefit those who misappropriate resource
revenues.
Decision 4: The aggregate savings decision
By far the most important decision point concerns the proportion of
resource revenues that should be saved. There are two distinct
timeframes that need to be taken into account in reaching this
decision, one long term, and the other medium term.
The long-term timeframe concerns depletion. The extraction of
nonagricultural natural resources depletes the stock of the asset. To
maintain the overall value of assets some of the resource depletion
should be offset by an accumulation of other assets. The proportion
that should be saved depends upon the likely length of life of the
resource and upon the likely rate of return on investment relative to
the rate of return earned by leaving the resources in the ground, but
in general a significant proportion of revenues from resource
extraction will need to be saved in order to avoid overall depletion of
assets.
The medium-term timeframe concerns the price cycle of the
commodity. The world prices of commodities have a long record of
substantial fluctuation. While there is nothing so predictable as a
genuine ``cycle,'' manifestly there are periods when prices are
sufficiently out of line with their long-term average level that it is
reasonable to expect a degree of reversion towards the long-term mean.
There are good reasons why a government might try to smooth its
expenditures rather than simply let expenditure track these extreme
fluctuations in revenue. Volatility in expenditures gives rise to
inefficiencies: For example, during periods of high expenditure
commitments are made to rather low-return items which then can only be
financed during periods of low expenditure by deep cuts in items which
should have been prioritized.
Offsetting depletion and smoothing the price cycle both require the
government to save part of the revenue from resource extraction. This
decision to save is subject to further ``time-consistency'' problem.
Consider the decision of a prudent finance minister whether to save
revenue. The saving necessarily defers the spending decision to the
future, a time when the minister responsible is likely to be different.
If this future finance minister is also prudent then no issue arises.
However, if the future finance minister is ``populist'' then the
revenues saved by the prudent finance minister are simply handed to the
populist finance minister to spend. Let us suppose that not only do
prudent finance ministers prioritize savings more highly than populist
ministers, but that the quality of their spending is higher. Thus, the
prudent finance minister faces a dilemma. If there is a significant
risk that there will be a future populist finance minister then the
current prudent finance minister may reasonably decide that the best
course of action is not to save the revenue even though savings would
otherwise be warranted. This is a form of time-consistency problem
because future governments would be better off if only they could tie
their hands, renouncing the freedom of a future populist minister to
mis-spend the savings of the current prudent minister. If they
renounced this freedom the prudent minister would save and this would
make a future government better off, whether or not the minister was
populist, whereas while ever the future government retains this freedom
then it cannot benefit from it. Evidently, a future government cannot
itself renounce its freedom because it does not yet exist. However, the
present government can act on behalf of the future government by
establishing a fiscal constitution. By this I mean a constitutional
provision which enshrines some basic principles of the savings decision
which curtails the freedom of a future populist minister of finance to
deplete assets.
In the absence of a fiscal constitution the decision of a prudent
finance minister not to save windfall resource revenues need not be a
mistake. Rather, it is the consequence of misaligned incentives.
Several resource-rich governments have now recognized the need to
realign incentives by introducing a fiscal constitution. For example,
the governments of Chile and Nigeria have both recently enacted such
provisions to handle the depletion and price swings of their commodity
exports, copper and oil respectively. Constitutions can always be
overturned. However, the process of overturning them is both public and
slow. These obstacles might well be sufficient to deter a populist
minister from even attempting to deplete assets: by definition, a
populist finance minister is in a hurry (in economic terminology he has
a high discount rate). In making the populist option more difficult,
the fiscal constitution also reduces the returns to becoming a populist
minister of finance and thereby makes populism less likely.
Decision 5: The public investment decision
Having determined the proportion of resource revenues to be saved,
the government must then decide which assets to acquire. Specifically,
it must decide how much of the savings should be held abroad and, for
the savings invested domestically, which investments should be chosen.
There are two distinct reasons for saving abroad. One is that those
savings intended to smooth consumption over the price cycle need to be
held in liquid form so that they can be depleted during the
unpredictable periods of low prices. Hence, they have to be held in
foreign financial assets. Domestic financial assets, though liquid at
the level of an individual holding, are merely claims on illiquid
investments within the society and so cannot in aggregate be
liquidated. The other reason is that at some point the return on
domestic investment is liable to drop below that available on world
markets and at this point it is better to hold savings temporarily
abroad until conditions within the economy permit them to be switched
into domestic investment. This is termed ``absorptive capacity.'' The
rate of return on domestic investment is influenced by many factors,
but a particularly pertinent one is that during savings-driven
investment booms returns are driven down due to both the congestion at
the planning stage and rising construction costs at the implementation
stage. It is usually more efficient to stretch the domestic investment
of the savings generated by a commodity boom over a longer period than
the commodity boom itself.
Complementing these macroeconomic considerations about absorptive
capacity, are microeconomic concerns about the selection of public
investment projects. For a project to be satisfactory it should meet
two criteria: Honesty and efficiency; and so these aspects of the
project need to be assessed prior to approval. An effective public
investment process should thus subject all proposed projects to two
tests. Dishonesty in public investment procurement is a massive problem
in resource-rich countries. The minimal defence against it is to
require all projects to go to competitive tendering. Since it is easy
to subvert competitive tendering, as with auctions there needs to be
some scrutiny of the process backed by certification that the tendering
process meets reasonable standards. For example, a common way in which
competitive tendering is subverted is for public officials in charge of
procurement to agree in advance with a particular firm that once it has
been awarded the contract the government will change the specification
in such a way as to warrant repricing. A contract to build schools
might be recalled in order to change the design of the buildings and
the alterations accepted at a price higher than is warranted. While
there is indeed a genuine need to be able to adjust contracts, since
the adjustments are not retendered there is scope for abuse and so the
process needs to be policed. Honesty is not enough. Some of the most
egregious public investments of resource revenues would have been
disastrous even if their implementation had been completely honest
because they were foolishly conceived. The defence against this process
has to be technocratic: The likely rate of return on projects has to be
estimated in an impartial manner, with only those projects that offer
returns over some threshold set around the rate of return on assets
held abroad being approved. This was in essence the decision process
that enabled Botswana to convert diamond revenues into world-beating
growth. The evaluation of public investment projects is standard in
developed countries, but it is also a process that is readily gamed.
Because future returns are inevitably hypothetical, it is invariably
feasible to manipulate estimates to suit political demands. Hence,
again there is a need for scrutiny and certification of the process.
The tendency to use the revenues accruing during commodity booms
for surges in public investment projects which are poorly selected is,
to an extent, a mistake. However, it also reflects misaligned
incentives. Where ever public procurement processes and the scrutiny of
rates of return are weak there are large personal gains to be had from
maximizing the current flow of public investment projects. Indeed,
since many of the kickbacks accrue upon commissioning the project,
there is an incentive to commission far more projects than can be
implemented, resulting in the common spectacle of projects that stand
uncompleted for many years while new ones start up around them. Thus,
the core problem is less a matter of mistakes than of misaligned
incentives.
4. the role of voluntary codes
Recall that our starting point is the current commodity boom
against the backdrop of the dismal history of the resource curse.
History must not be repeated, but it will be repeated unless there is
an appropriate combination of learning to correct past mistakes, and
institutional innovation to correct misaligned incentives. I now
consider to what extent voluntary codes can be useful in facilitating
both learning and the realignment of incentives.
Manifestly, voluntary codes can be powerful instruments. The EITI
and the Kimberley Process are both important examples of how voluntary
codes can improve resource extraction. To what extent can this approach
usefully be extended?
Voluntary codes have power for four core reasons. Their basic
rationale is informational. The code simply codifies good practice and
thereby informs governments as to what is generally considered
sensible. The codification helps to distinguish this particular advice
from the babble of advice, often contradictory, to which governments
are subjected. Governments can respect codified advice because they
infer that it has been subject to thorough and impartial analysis.
However, the informational role is probably not the most potent
aspect of codes. In all the badly governed resource-rich societies
there are reformers anxious to critique poor policies. However, the
reformers themselves face a coordination problem: Each voice for reform
is also, often inadvertently, a voice for self-promotion. Thus, for the
normal human reasons of personal rivalries it is often difficult for
reformers to coordinate around an agreed set of objectives. Recognizing
this, the opponents of reform often play a game of ``divide and rule.''
A code has the advantage of providing a neutral goal around which
reformers can rally. By being depersonalized, it is both easier to get
pressure for adoption, and easier to defend once adopted than any
personalized reform.
Voluntary codes also provide a norm for the coordination of
external pressure. Adherence to the EITI rapidly became a condition for
some donor assistance, and adoption of the Kimberley Process became a
benchmark for NGO pressure.
Perhaps most importantly, codes separate the sheep from the goats.
By revealing those governments that are willing to comply with a
particular set of standards, they also reveal those that are not. There
is a strong incentive for governments not to reveal themselves as being
in the latter category. A dramatic instance of this phenomenon was the
creation of the Euro, something initially intended so that France could
have a common currency with Germany. Once Spain announced that it
intended to meet the criteria for membership, Italy and Portugal felt
compelled to do the same. Similarly, the Kimberley Process, though
voluntary, has rapidly attracted every diamond producing country in the
world.
Where is there currently scope for codes concerning the revenues
for resource extraction? Of the five critical decision points, only the
third is currently covered. All of the other four have potential for
being codified. One new code could cover the design and conduct of
auctions. A second could cover the specification of the time horizon
and tax regime, for example, setting limits on the horizon of rights
sold by transitional governments. A third could cover the savings rate
out of resource revenues likely to be appropriate. A fourth could cover
the procedures for public investment.
If these codes are to be promulgated some entity needs to be
responsible for them. The precedents for the promulgation of voluntary
codes suggest that various approaches can be effective. Many codes of
economic behaviour have been promulgated by the IMF and are part of its
annual Article IV consultation process in which all its member
governments are required to participate. The Kimberley Process is run
by public-private partnership between the diamonds industry, NGOs, and
diamond-producing governments. The EITI started as an NGO campaign, was
then adopted by the British Government, was then tentatively and
temporarily lodged with the international financial institutions and
has now become an official international organization headquartered in
Oslo. Which agencies would be most appropriate as the codifier of the
four proposed new codes?
It would clearly be both more effective and more practical to lodge
the new codes with existing agencies rather than attempt to create new
ones. The four codes naturally cluster into two pairs. The first two,
on auctions and the specification of mineral rights, are both concerned
with transparency in resource revenues. The other two, on the savings
decision and the processes of public investment, both concern the
conduct of budgets. The first pair is close to the existing mandate of
the EITI and would most naturally be lodged there. They would require
the organization to acquire some expertise in the conduct of auctions
and the design of rights but this would surely be feasible and
complement the expertise that as a new organization it already needs to
build. The second pair, concerning budgets, belongs most naturally with
the IMF and the World Bank. The Fund is indeed already advising
governments on savings out of resource windfalls and codification would
be a sensible development of this work. Similarly, the World Bank
routinely undertakes Public Expenditure Reviews, and specific
guidelines on processes of public investment for resource-rich low-
income countries would be again be a natural extension of this work.
Independent international verification and certification are now
standard in many areas of economic activity. The new codes would
require two distinct systems of verification, one concerning the
conduct of auctions and the other the conduct of public investment. The
core rationale for each of them is that a government needs to be able
to demonstrate to its citizens that it is in compliance with its own
stated commitments. The governments that are most in need of this
capacity to enhance their credibility are those with poor reputations
that are attempting to reform. Hence, the provision of verification and
certification is not a quasi-police operation intended to force
compliance upon an otherwise recalcitrant government. Rather, it would
enable those governments that were genuinely committed to reform to
reveal their type. As such governments revealed their type, corrupt
governments would be revealed by default and this would facilitate
pressure for change within their societies. Reforming elements would be
able to ask why their governments had chosen not to comply with
international norms that other governments had adopted.
5. the role for international law
International law is so difficult to get enacted that it must be
used very sparingly. Is there a real need for the promulgation of new
international law regarding resource extraction? The one area where new
law might be pertinent is to reinforce the voluntary code on auctions
by requiring those resource extraction companies based in the OECD to
enter into new contracts only through certified auctions of extraction
rights. Would this be desirable and is it feasible? The close analogy
to such a law is the antibribery laws which were adopted across the
OECD in a coordinated process orchestrated by that body. It was
important for these laws to be coordinated since no single country was
prepared to disadvantage its own businesses vis-a-vis those of other
countries by enacting a law individually.
What would be the consequences of such a pan-OECD law? One possible
consequence would be that the governments of resource-exporting
countries would not adopt certified auctions and as a result China
would scoop the pool of resource extraction contracts. However, this is
not a likely outcome. Once the law was adopted, a government that
decided to sell extraction rights through a nonauction process would
know that a key group of potential purchases was thereby excluded. In
effect, the decision would hand monopsony power to China and thereby
manifestly disadvantage the country. It is one thing doing deals with
China when China knows that the government with which it is dealing has
many alternatives, and quite another to choose to put oneself in such a
disadvantageous position. Obviously, by holding an auction a government
would not in any way preclude selling the extraction rights to the
Chinese. Hence, within resource-rich countries there would be strong
pressure to preserve competition for the purchase of resources by
adopting auctions.
If as a result of the legislation auctions became standard then the
OECD countries would benefit. At present sales are often conducted in
an opaque manner. This is sometimes tantamount to a competition in the
degree of corruption that the bidder can countenance, and sometimes a
competition in which China can supplement its offer by aid but OECD
companies cannot.
Laws involve penalties for breaches. However, the court-inflicted
penalties need not be severe because the power of deterrence in this
case is likely to come predominantly from citizens, both as consumers
and as employees. No significant OECD-based resource extraction company
could afford to acquire concessions for resource extraction through
processes which clearly breached of the law. In effect, much of the
power of the law here comes from the information signal conveyed by the
detection of a breach. Consumers and employees know to penalize
companies that act illegally.
6. conclusion
The current commodity booms constitute the most important
opportunity for development that low-income commodity exporters have
ever had. Yet if history repeats itself this opportunity will be
missed. In these countries aid has limited potency: Their governments
are sometimes already awash with revenue. A neglected type of
assistance, which might be more helpful, is the promulgation of
voluntary codes and laws specifically designed to improve the economic
governance of resource rents. For the resource-rich countries improving
economic governance is of the essence. In this paper I have suggested
how new codes and laws could address both the mistakes and the
misaligned incentives that lead inexorably to the resource curse.
Difficult as these new codes and laws would be to promulgate, the costs
are trivial both relative to the scale of existing development
assistance and to the likely beneficial effects.
Senator Feingold. Thank you, sir.
We'll begin with 7-minute rounds.
Professor, I'll begin with you. Thank you again for your
testimony. Given your long career of working on these issues,
I'm curious where you've seen progress in reversing the
resource curse. Are there particular success stories that you'd
turn to in Africa that we can use as examples for efficient and
transparent resource management?
Mr. Collier. Yes. I'm moderately optimistic. I think
there's quite a lot of learning from failure been going on. We
see that most remarkably in Nigeria, where the reform team that
came in in 2003 really had learned from failure. It was just
determined not to repeat history, got this whole--two things
going. One was the fiscal responsibility act, which was
fundamentally about the savings decision. But the other was
introducing competitive tendering in public procurement, which
was fundamentally about the investment decision.
So they managed to set up institutional processes on both
those two critical downstream decisions. So it was very
impressive.
I was recently in Uganda, where the Ministry of Finance and
the central bank are very concerned to handle these things
right, very aware of the pitfalls. Last week I was in Zambia,
where the Governor of the Central Bank is deeply concerned. And
with the sad death of President Mwanawasa, that's a real
turning point in that society. It could go right or wrong.
So across the continent there's a lot of awareness. Ghana,
which has got, like you say, all these discoveries, it's
fragile. It could go populist. They've got an election coming
up. It's an easy issue for the three candidates to promise to
throw a consumption party. That's the downside danger. So it's
trying to--the only way to counter that is to build a more
informed society on the custodial role of depleting these
assets and pointing to the neighbors, the sad history of the
neighbors who have already been there.
Senator Feingold. Let me ask you about Chad and Cameroon.
As you know, controversy has long surrounded the 650-mile oil
pipeline between Chad and Cameroon that the World Bank helped
to construct. Earlier this month the Bank finally canceled that
agreement because the government has failed to translate
revenues into poverty reduction.
What can be learned from the bank's experience with this
project?
Mr. Collier. I think, to be honest, I think the bank was
foolish to go into the agreement from the start.
Senator Feingold. Foolish for going into it in the first
place?
Mr. Collier. Yes. I think the proper analysis of the Chad
deal would have said this is what economists call time
inconsistent. That is to say the government had no incentive to
keep its promise. It had every incentive to make a promise,
because by making the promise--the promise was the government
will pass legislation, the World Bank will take the
reputational risk, and the oil companies will sink investments
of $4.2 billion.
Then you ask yourself, which of these actions is easier to
reverse? And it's not easy to take the $4.2 billion investment
out of the ground, but it's very easy to change the
legislation. And the oil companies, once that's done, have very
little incentive to put any spine into the defenses because
it's the World Bank which is carrying the reputational risk.
So the whole structure of that deal was to my mind doomed,
and so it shouldn't have been set up. Twenty minutes of decent
economic analysis at the start would have said this is doomed.
Senator Feingold. Thank you, Professor.
Mr. Goldwyn, thank you also for your testimony and for your
previous service to the United States. I want to first follow
up on your assessment of the bureaucratic obstacles within the
U.S. Government to effective interagency strategy and
implementation with regard to promoting good governance and
transparency in energy-producing countries. Could you elaborate
a little bit on those obstacles?
Mr. Goldwyn. Yes, thank you. In the United States right now
we have a very disaggregated system of responsibility in terms
of energy. Energy advocacy--production, the Commerce Department
is interested in that. Energy security itself, no one is really
responsible because energy security means in some senses
stability of supply. Well, that's a political question, how
stable are your suppliers. So it means that the Africa Bureau
would worry about Nigeria if they had time to focus on Nigeria,
but the people in the economics and business office, which
might worry about supply, don't have a relationship with
Nigeria and they're not going to go in and talk to the
President. At the very senior level, there's no one really on
the national security staff which is responsible for looking at
both the relationship of the countries and the impact of the
economics and the impact of governance, transparency, the
underlying problems. Human rights people have one piece and
economic people have another piece and the bilateral have
another piece.
Nobody on the seventh floor of the State Department is
really responsible for doing this. The Under Secretary for
Economics, Energy and Agriculture is in there too, sort of has
that job, but not the focus. So as a result, we don't have an
integrated look at this.
Even on transparency, EITI is the Economics, Energy and
Agriculture Bureau. Voluntary Principles on Security is in the
Democracy Bureau. If you're going to make change within a
country, it's going to be at the head-of-state level,
especially in Africa and developing countries. It's where all
the policy is made. And there's nobody in the economics and
business office that's going to get a meeting with a head of
state of any of these countries.
The issue is this: When our President or when our Secretary
of State talks to these countries, is this on their agenda or
not? Right now it's not. So it's a failure of organization, but
it's also a failure of policy focus. Right now we don't see the
problem as an integrated whole. There is foreign policy and
there's energy and we don't mix them together.
That part you can't fix with a wiring diagram. That's got
to be a change in consciousness and strategy and policy.
Actually, one of the recommendations I didn't talk about in my
oral testimony is we might commission a national intelligence
estimate on energy security in Africa or worldwide, because
it's a way that people will see the risks of governance and
transparency and supply. By having an estimate, you can put
that on their table and it will get the attention of all the
policymakers. That's something that the Congress might be able
to motivate.
Senator Feingold. Thank you for that suggestion, Mr.
Goldwyn.
Senator Isakson.
Senator Isakson. Following up on that point, before you
asked that question and he answered, I was getting ready to
address the question about lost influence. But let me go to
this disaggregated responsibility. I think that's a correct
statement, that there is not as much coordination as we need
between agencies dealing with Africa.
But I would take issue with the statement you made about
we've lost influence in Africa. I'm not an expert. I've only
been on this subcommittee for a year and a half. But it seems
like I can't remember a time when the United States has
invested more or spent more, or had more of an emphasis in
Africa, in my lifetime than we have over the past 8 to 10
years, from PEPFAR to engagement with the African Continent to
AFRICOM and stuff like that.
So I just wanted you to elaborate a little further on this
recent lost influence in Africa that we have.
Mr. Goldwyn. Thank you for the question, Senator. There's
no question the United States has a lot of engagement in
Africa, and our engagement in the health sector is really
dramatic, and our engagement in counterterrorism and the Pan-
Sahel Initiative, or now the Trans-Saharan Counterterrorism
Initiative (TSCTI), is impressive also.
But we have a lot of competition now that we didn't have a
decade ago. We not only have competition from the Europeans,
but China and Africa. There are now hundreds of companies in
the upstream in Africa. The wealth has changed the calculus
also. There was a time a decade ago when an offer of trade or
an offer of aid or debt relief would give the United States
traction with these governments. They needed to listen to us
because their political survival was dependent on their
relationship with the United States. But with these incredible
revenues right now, they can borrow in the capital markets or
they can get a loan from China, and they don't need our debt
relief and they don't need our aid, and the areas where we want
to give aid, like civil society, is not an area that's top of
their agenda anyway.
So our ability to basically use pressure and influence to
change their behavior has evaporated with the competition and
the wealth, but also with the disengagement. Take Angola for
example: One school is they're bad, don't talk to them. But the
problem when you don't talk to them, when the Assistant
Secretary of State for Africa goes there once every 4 years, is
they don't really care a whole lot about what we think. They
have no stake in the relationship.
That's why I think we can recover that by more engagement.
On the key countries--Angola, Nigeria, Equatorial Guinea--we
now engage and we have shown some results for that. But a lot
of these countries, we don't really talk to, and it's hard to
have influence without that relationship.
Senator Isakson. On that point, Equatorial Guinea, Obiang
just released those 34 political prisoners that he'd had, that
we've been insisting on for some time, which was a move in the
right direction on the human rights side. I think the State
Department, at least in the engagement I've had with them, has
worked very hard on promoting exactly that type of behavior,
and finally raised enough pressure to where he did it. So that
was a good move by them.
Mr. Taylor, what is Public Witness? Is that the name?
Mr. Taylor. I'm sorry? Could you repeat that?
Senator Isakson. What is Global Witness?
Mr. Taylor. Global Witness.
Senator Isakson. Tell me a little bit about what Global
Witness does.
Mr. Taylor. Global Witness is a nongovernmental
organization. We have a base in London, we have an office here.
Some of my colleagues are here with me. We're an organization
that has spent since its inception in the early 1990s its time
looking at the link between natural resources and conflict and
all the various facilitating factors around that. So our
interest has been the role of middlepeople, the key actors,
companies associated or not, the various resources and so on,
the trade mechanisms and pathways.
Part of what we do is investigative, so we do also
undercover investigation work. Some of it's normal, everyday
type of research that anyone else might do. We compile our
information together in reports where we present our findings,
which are the findings of people on the ground, and then we
basically visit wherever appropriate, whichever countries are
appropriate, to seek positive change. Hence our involvement in
processes like EITI, like the Kimberley process, and so on.
Senator Isakson. Well, I read your testimony, which I found
to be very informative, I might point out. You made a comment
in your verbal comments about this needing to be a process of
best performance, not only by the African country but also by
the company participants. I read in your printed statement that
recent testimony by Mr. Stanley pleading guilty to a $180
million payment to one of the governments. I've forgot which
one it was. That I guess is the type of company participation
you're talking about.
Is that the exception or is that the rule in Africa right
now with American companies?
Mr. Taylor. I suppose I've looked at this more from an
international perspective.
Senator Isakson. Well then, international.
Mr. Taylor. But that of course involves American companies.
So I think that the truth of the matter is that we've looked in
lots of countries outside of Africa as well, Central Asian,
former Soviet Union Republics as well, and the pattern seems to
be that it really depends on the players on the ground and the
extent to which there is or isn't governance and who the key
players are in the country.
So you will find in some countries some companies have done
all sorts of questionable things, and yet you will also find
the same companies being almost champions of the good in
neighboring countries. So really, it's not a clearcut,
homogeneous type of effect. So we know of companies, for
example, in Angola that were shipping arms to the government
side through invisible subsidiaries that didn't exist on any
formal books, based in tax havens, during the last stage of the
fourth stage of the Angolan civil war. What on Earth is an oil
company shipping arms for?
Again, that's not uniform and it didn't just apply to a
certain company from Western Europe who doesn't exist any more.
I can elaborate a bit more if you'd like. But there were more
than just the obvious ones, the worst players involved in this
type of practice.
Senator Isakson. So from that answer I take it it's more
what the countries proposed, rather than a culture of doing
business of just offering bribes going in; is that correct?
Mr. Taylor. I think the context of the country concerned
influences the type of behavior that happens. But I think, just
as within governments you meet people who are very effective
and you also meet people who aren't very effective, I think the
same applies in companies. So it really depends who's on the
ground in the company. Perhaps had a different executive been
involved in that particular country, they might have chosen a
different pathway. Who knows?
What we see is what we've pulled up and found in the course
of digging around, sometimes for a long time. And you get a
very clear picture of who's been doing what and how they've
been doing it.
It's for that reason I think that, whilst the EITI
addresses this kind of bringing governments in and I'm very
keen to stress that I think it needs to be a good club, a club
of the good, rather than a club of the bad who've been forced
to join--hence I think the United States and Britain and so on
should also participate--it's not enough, because there are
some countries that will never join, like Angola we think--why
would Dos Santos Inc. want to make itself accountable? The
answer is it doesn't. And at the same time, different companies
have been involved. So it's necessary to bring in elements of
rigor around the accountability for the way in which the
companies themselves have behaved.
Senator Isakson. Thank you very much.
Senator Lugar.
Senator Lugar. Thank you very much, Mr. Chairman.
Let me once again just take up the point that you made,
Senator Isakson. That is that the three witnesses we have
before us now have written outstanding papers and offered
insights I believe that are very, very helpful, and we
appreciate that. I want to pick up particularly one of these
insights about the organization of our own government. You
dwelt on that, Mr. Goldwyn, in pointing out the dilemmas of who
in our government has some responsibility for some facet of the
energy problem we're discussing this morning.
But the central point that some of us have tried to make in
the committee, even offered legislation--and Chairman Biden has
been very active in this area, in addition to Chairman
Feingold, and I've tried to participate in making the point to
Secretary Rice and to others that we really have to have an
Energy Secretary or a coordinator, someone of stature, who is
able from the security standpoint to make a difference.
Now, there have been some modest attempts made in the
Department in that direction, which we appreciate, and I pay
full tribute to those who have those responsibilities. But as
you say, they do not appear to be able to get items onto the
President's agenda or maybe even the Secretary's agenda, as
there are face to face meetings with other persons at the
highest levels, and that is of the essence right now. There may
come a time in which the fabric of diplomacy of the countries
that we're discussing in Africa permits assistant secretaries
or others on down to have these sorts of dialogue and make a
difference, but not at the present time, which requires higher
level actors.
So I am hopeful that our persistence and yours from the
outside will be helpful, because this is an essential point for
our government right now in discussing Africa or, for that
matter, in conversations with people in Russia, for the same
reason.
Well, let me just follow through by saying that in Angola,
and we spent I think quality time on that today, the chairman
has mentioned his meeting President Dos Santos many years ago.
After several years, then-Secretary Reuben Jeffrey visited
Angola last summer, which was in fact the first high-level
contact by an American official in the country. Our staff
members who are behind me today visited this summer, and I
think since the chairman's visit were the first persons
representing Congress in any way.
It may be that our officials feel Angola is inhospitable,
but nevertheless it is a very important country. We often talk
about the need for diplomacy with countries with whom our
relations either need repair, strengthening, or are virtually
nonexistent, and this would appear to be a good example. It
arises in part because it's an important country strategically
in Africa, but also because of the energy focus that we have
this morning and the implications for others, not only in
Angola but outside of the country in this respect.
So I appreciate your pinpointing the lack of contact and
observation. Even if we got right our organization, whoever the
Secretary of Energy was and the State Department would need to
go to Angola, or someone representing him or her at that level,
at some point.
Let me just pick up a third point. You've mentioned the
Norwegian model, perhaps inappropriate for many of the African
states, and I accept that point. But I can remember a trip to
Azerbaijan and a visit with President Aleyev in 2005, at the
very beginning of the first trickling of oil from the Baku
platform of BP starting its headway through Georgia on to
Chehan, Turkey. The question before that country at that point
was just the one we're discussing today, What degree of
transparency? Really, not that Baku had not had an oil history
for decades, but this was a new beginning, and obviously the
predictions of the change of the GNP for Azerbaijan were at the
order of 50 to 100 percent a year for the better part of the
next 5 as projected.
When I asked President Aleyev the question, he cited the
Norwegian model. Without your knowledge about this, I said:
That's a good model; I appreciate that; I'm going to report
that to everybody in the United States.
Now, in fairness, I've seen President Aleyev in each
subsequent year, 2006, 2007, 2008, just this summer. He's
followed through. Now, it's not exactly the Norwegian model,
but still there are some very bright young Azeris, economists,
who do make transparent the amount of money coming into the
country and the various levels that are going into the
government now, because the next point then was, what about the
rural roads in Azerbaijan or the schools for the people that
are not in Baku, or the cleanup of the mess of the oil
business, say for 7 decades, or so forth. And each time the
President has pledged that they're doing it, and he's begun to
produce figures that are doing this.
Now, I cite this simply because conversations and
visitations of this sort are I believe helpful. Not that I was
that persuasive, but somebody at least kept asking, kept
reporting. He knew that it was being reported. He was proud
really of the reports. We reported to the people of Azerbaijan
in press conferences within the country what was occurring,
with the full knowledge of the President, not as a covert
agent.
It's a very small country, but a huge amount of money, and
it continues to grow and will, with 1 percent of all the oil in
the world going through that pipeline today. And it all starts
there, with huge royalties coming in, plus the whole strategic
problem of the NABUCO pipeline situation.
Now, this is an interesting model for African countries to
take a look at. They have many more people, much more diverse
population and governance situations, but it's not unique in
the world today to do it right and at least to make some
headway, and to pay credit internationally to people who do
this sort of thing. Our senior officials visiting can do that.
So I take advantage of this hearing and your presence to
make these points because I think they may be important for our
diplomacy, and I congratulate you again on your scholarship
which informs all of us.
Thank you, Mr. Chairman.
Senator Feingold. Thank you, Senator Lugar.
I'll just have a few more questions as we get near the end
of the hearing. Back to Nigeria again, Mr. Goldwyn, Nigeria is
so critical in terms of our energy policy, as Senator Lugar was
just talking about. Yet our engagement in the Niger Delta under
this administration has been minimal. How specifically can the
next administration reengage and what are the first steps, and
what would be the role for Congress in this?
Mr. Goldwyn. Thank you for the question. Just one word for
Senator Lugar, I just have to say: Thanks to you for your
leadership on this. Clearly we wouldn't have a Caspian
ambassador-at-large if it wasn't for your legislation. The
Western Hemisphere. You've advocated this issue in all regions
of the world, and it is an example of how it can work. So thank
you and your staff for your leadership.
On Nigeria, we have to be humble about Nigeria because the
core of the problem there is a lack of political legitimacy.
You have a President whose candidacy is still not certain
because it's under appeal. He doesn't have control over the
Governors. A lot of the Governors may have control over him.
You have a Federal system with limited powers over the regions.
But I think there are a number of ways in which the United
States can help and I think we need to work first with the
European countries and perhaps even with China on it. First is
to use the power of the Presidency, our President and Secretary
of State, to communicate to Nigeria, as we have not
significantly done over the last 6 years, that this is an
international problem. Crime is spreading to neighboring
countries. Destabilization is happening to neighboring
countries. Nigeria's own democracy is at risk. So part of that
is to keep the pressure on to deal with this problem.
Deal with this problem has two aspects. One aspect of that
is development and the other aspect of it is political
engagement. On development, I think if we are willing to be
quiet about it and to talk to this Niger Delta ministry, to
talk to others, about how they can spend the significant sums
available for development to make a difference in the Delta I
think that can be helpful, because there's been a lot of money
washing around, as has been said here. It's absolutely true.
But whether that's roads, job creation, they've got to have
change on the ground.
I think we do have expertise, we this community here, the
development community, but that has to be quiet and not in the
newspapers and not public, because if it looks like external
pressure they're going to push back on it.
The second thing is I think we do have to have a quiet
conversation with the Nigerians that it isn't just their
problem diplomatically. There's strong resistance, especially
to the former colonial powers, to go in and tell them how to do
their business. But the fact is that by having a contact
group--United States, European Union, the Chinese, if they're
willing to be part of it--that you can give the groups in the
Niger Delta, the militants in the Niger Delta, the sense that
there is an external watch going on over whatever political
concord is going on. We're not going to be guarantors per se in
terms of military, but we can be helpful.
I think the third thing we have to do is keep shining a
light on the transparency side and on the crime side. I think
we, through a previous CSIS study, we figured out that for $100
million you could put basically a ship with radar capability
into the river delta and some fast boats and you could
basically shut off bunkering from the Niger Delta through two
river streams.
The Nigerians didn't want to take us up on that offer, but
I think we've got to keep putting that in their face because
it's a way to say, we can show you how it's done and then you
can buy this yourself. So I think there's a security strategy
as well.
But I think the last thing I would say is something we
didn't do and we need to do in the future is to acknowledge
progress where it has been made. We never complimented, at the
Presidential or Secretary of State level, the Nigerians for
doing Nigeria EITI, for doing the greatest, most intrusive
audit ever done under EITI principles, for publishing what was
paid in the States and everyplace else. We've just sort of hit
them when they're down, but we never said this is great. And
they need that for the political return for doing this kind of
work, to give them a political incentive to do it. So I think
we need to find a way to say ``good job'' where we can.
Senator Feingold. I think that's a really good point. I
remember when President Obisanjo wanted to think about going
for another term and Parliament said no. I went out of my way
to say, this was a great thing that you stood firm on this.
It's very important that you acknowledge the positive. I
appreciate that comment.
Mr. Taylor, it looks like you wanted to comment on that
point, and then after you do that I'd like you to go into a
little bit more detail about the importance of civil society in
African countries, the critical role they play in ensuring
accountability within extractive industries. In your
experience, how can civil society in Africa be further
supported to play a more active watchdog role?
Mr. Taylor. Thank you, Mr. Chairman. It's just a small
point. I don't disagree with what David was just saying in
terms of the Niger Delta and bunkering, but this might be of
interest and I think it requires a bit further checking because
I would sort of solidly support such an approach. But a number
of years ago we were informed that Shell had a technological
capacity to essentially--this might be the wrong terminology,
but essentially fingerprint oil from certain locations.
Obviously, you need a reliable database from the various
places.
The reason I want to raise this is we're talking a lot of
oil goes disappearing net. You hear the figures 300,000 to \1/
2\ million barrels per day can just go; a vast quantity anyway.
My point really is you can't hide that stuff. Somebody in some
refineries are getting it.
At the time of the conversation I'm referring to, there was
reference to a refinery--I don't know which one--in Texas and
another one in Rotterdam. So wouldn't it be interesting from
the enforcement point of view to check whether certain supplies
of oil into various refineries that maybe one could sequence
are actually receiving this stuff, because it's basically
stolen goods.
At the time there was a refinery down the coast, I think
operated by TOTAL, in Cote d'Ivoire that took only 30,000
barrels and they discovered that it was taking bunkered oil.
What the government did I understand was to short out the
bunkerers by basically formulating a proper contract so the
money went to the state instead of the bunkerers. It seems to
me that would be a very cost effective, very nonviolent way of
dealing with what is otherwise a difficult thing when it comes
to enforcement with lots of people with guns. It just seems I'd
just like to commend that as something worth looking into.
In terms of civil society itself, it's something I really
wanted to emphasize. We've encountered a number of problems in
different countries, ranging from Congo-Brazzaville, where our
colleagues there were judicially harassed for nearly a year, to
Gabon, where civil society organizations were effectively
closed down whilst Gabon was a board member of EITI.
One aspect I think of a heightened effort by the U.S.
Government, but also other participants, is to jump on this
stuff, think to create the culture where a country like Gabon
wouldn't even consider closing down civil society whilst a
board member. I find it quite unconscionable that they even
thought that was a goer. So I think to do something to address
that.
We desperately need to have civil society empowered,
because this is not an audit process where you put the file on
the shelf; this is about civil society holding government
accountable. If, as we referred to EG earlier, 34 political
prisoners released, well, great. But they still win 99 percent
of the vote, there's no opposition press, there isn't really a
civil society. We need to do something about that. Otherwise,
frankly, it becomes a bland auditing process and won't deliver.
Senator Feingold. Thank you, Mr. Taylor.
I thank the whole panel. It's an excellent panel. I know
all three Senators involved feel that way. I particularly want
to thank my colleagues for their very serious participation in
this entire hearing.
I'm going to close the hearing. We're going to leave the
record open until Friday, without objection. With that, the
hearing is concluded.
[Whereupon, at 11:27 a.m., the hearing was adjourned.]
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Additional Material Submitted for the Record
Prepared Statement Hon. Charles E. Schumer, U.S. Senator From New York
Chairman Feingold, Ranking Member Isakson, and the other members of
the subcommittee, thank you for holding this hearing on this important
subject. I am pleased that the committee is looking for ways to address
the resource curse and to promote policies that will help countries
with abundant natural resources develop economic development and
political stability. I strongly believe that utilized properly, natural
resources can play a positive role for economic and political
development in host countries. However, declining economic growth,
social inequality, political repression, domestic violence, and
pervasive corruption are more often than not the outcome when
developing nations tap into their natural resources.
One of the most serious problems with the operation of extractive
industries in developing countries is the lack of transparency in the
accounting of revenue and profit from extractive industry. This lack of
transparency often gives way to endemic corruption, creating ``rentier
states,'' with weak government institutions that use these revenues to
keep themselves in power, and often fall prey to powerful outside
interests. As a result, citizens of these countries see little, if any
benefit, from their own natural resources. More often than not, they do
experience all the negative consequences from the extraction of natural
resources. And corruption within host governments increases the
potential for global economic and political instability in the form of
civil unrest, state failure, terrorism, and economic and humanitarian
crises.
As a result, resource-rich developing nations rank at the bottom of
development indices, especially with regard to economic growth,
transparency, and stability. Countries such as Nigeria and Angola are
clear examples of this; their governments have consistently been bad
stewards of their countries' natural resources. Instead of generating
wealth and political stability, the income generated by natural-
resource extraction creates incentives and opportunities for
corruption, and finances extra-legal activities, such as militias used
for domestic oppression.
Currently, there are no rules in place that explicitly require any
disclosure of the payments that host governments receive from
international oil or mining companies that operate in their country.
All too often, the international companies who engage in natural-
resource extraction in these countries pay significant fees to the host
governments, as a prerequisite of even being able to operate within
their borders. As a result, it is difficult, if not impossible, to
calculate the revenue streams to a government from crude oil, mining,
and/or natural gas extraction, with any accuracy. This lack of
accountability allows the host government to abscond with the revenues
that should be shared equally by all citizens. Often, government
officials will use this wealth for their own personal enrichment and to
secure their hold on power, allowing them continued access to the
wealth of the state.
It is clear that without a financial accountability on the part of
the host government, the extraction of natural resources will continue
to perpetuate poverty and hinder economic growth and political
stability in developing countries. In an effort to ensure that these
payments to host governments are not being channeled to corrupt
officials or being used to fund political violence, I have introduced
the Extractive Industries Transparency Disclosure Act of 2008.
This bill would require all companies registered with the
Securities and Exchange Commission (SEC) to annually publish any
payment made to foreign governments for the extraction of natural
resources, including oil, gas, metal ores, coal, industrial materials,
and minerals. The legislation also directs the SEC to make the
information it receives publicly available on its Web site so that the
information is available to citizens of the host countries, nonprofit
organizations and other groups working in the host countries, and to
corporate shareholders.
The cost to the SEC of implementing and maintaining this
information would be minimal. According to Global Witness, 14 of the
world's 15 largest publicly traded oil and gas companies would be
covered by this legislation. This will help to ensure that a level
playing field for all companies is maintained. My legislation would
also protect foreign companies from giving bribes or other types of
illicit payments to host governments, as any and all payments made
would have to be publicly disclosed.
According to the Publish What You Pay Coalition, 25 of the world's
33 oil rich countries have ``low'' or ``medium'' UNDP human development
ratings; this bill will help ensure that the benefits provided by
natural resources in these nations are directed to those most in need.
Public disclosure of these payments will allow ordinary citizens and
government accountability groups to hold governments liable for money
stolen, misspent, or squandered. The transparency provided by this
legislation is a critical step in fighting corruption and the
instability it fosters in resource rich developing nations around the
world.
Instability in resource-rich is more than a development problem--it
directly impacts our national security, as well. In addition to its
current instability due to political and ethnic fighting, Iraq is also
at risk of the resource curse. Much of the current fighting is centered
over the shift of power between the Sunni Arabs and the Shia Arabs.
This fighting will be exacerbated once Iraq's oil and gas industry
resumes its previous production levels, given the historically high
price of crude oil. Even without returning to their preinvasion
production levels, Iraq is on pace to generate roughly $100 billion in
profit from its oil production in 2007 and 2008.
Unfortunately, the Iraqi Government has yet to pass a revenue-
sharing law to ensure that Iraq's oil resources are shared in an
equitable and transparent manner and that all current and future
revenues equally benefit Sunni Arabs, Shia Arabs, Kurds, and other
Iraqi citizens. Failure to pass such a law will make Iraq even more
dangerous and unstable, a disastrous outcome for Iraq, the region, our
servicemembers fighting in Iraq, and our national security.
I believe that the State Department needs to enumerate a clear
policy that encourages the Iraqi Government to develop quickly an
effective framework for national hydrocarbon legislation that includes
all interested parties. I also believe that the State Department should
be working to ensure that any contracts signed for both technical
service and oil field development do not circumvent this process and
thusly undermine it.
Chairman Feingold and Ranking Member Isakson, thank you again for
holding a hearing on this important topic that not only affects
economic growth, but our national security. I look forward to future
opportunities to advance my legislation and to make progress on this
issue in Iraq and other developing countries.
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